productivity effects in brazilian wage determination abstract the article investigates the characteristics of industrial wage determination in brazil using time series data for 22 manufacturing sectors for 1985 1993 the idea is to verify whether changes in sectoral productivity are relevant to explain changes in sectoral nominal wages first we present in a descriptive way the results of a statistical investigation of the data a second more encompassing purpose of the article is an attempt to interpret the results by means of a more elaborate econometric analysis the evidence suggests that rent sharing is indeed a pervasive feature of the brazilian industrial labor market

mexico and the brady plan mexico has throughout the 1980s been centre stage in the debates and events shaping the sovereign debt problem caught between a sudden collapse of its terms of trade and rising world interest rates mexico suspended debt service payments in august 1982 and ushered in what has since become known as the debt crisis in the following years lending to ldcs dried up and debtor countries were increasingly forced to run high trade surpluses to effect ever growing transfers from poor back to rich countries in the face of falling growth rates and rising inflation in the high debt countries then secretary of the treasury baker proposed the baker plan in return for economic reforms high debt countries would get new access to medium term new loans in addition to rolling over of amortization of old loans new loans had to come both from commercial creditors and the official lending institutions with access to capital markets restored the economic reforms would it was hoped allow the debtors to grow out of debt but experience in the high debt countries showed that the original hopes of the proponents of the baker plan went unfulfilled net transfers out of the borrowing countries went up rather than down as

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

ironing out the kinks in executive compensation linking incentive pay to average stock prices abstract traditional stock option grant is the most common form of incentive pay in executive compensation applying a principal agent analysis we find this common practice suboptimal and firms are better off linking incentive pay to average stock prices among other benefits averaging reduces volatility by about 42 making the incentive pay more attractive to risk averse executives holding the cost of the option grant to the firm constant asian stock options are more cost effective than traditional stock options and provide stronger incentives to increase stock price more importantly the improvement is achieved with little impact on the option grant s risk incentives after adjusting for option cost finally averaging also improves the value and incentive effects of indexed stock options

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

unionisation structures and innovation incentives this paper examines how dierent unionisation structures aect rms innovation incen tives and industry employment we distinguish three modes of unionisation with increasing degree of centralisation 1 decentralisation where wages are determined independently at the rm level 2 coordination where one industry union sets individual wages for all rms and 3 centralisation where an industry union sets a uniform wage rate for all rms while rms investment incentives are largest under centralisation investment in centives are non monotone in the degree of centralisation decentralisation carries higher investment incentives than coordination labour market policy can spur innovation by decentralising unionisation structures or through non discrimination rules

nonparametric conditional pricing of higher order multivariate contingent claims abstract this paper describes and applies a nonparametric model for pricing multivariate contingent claims multivariate contingent claims are contracts whose payoffs depend on the future prices of more than one underlying variable the pricing however of these kinds of contracts represents a challenge all known models are adaptations of earlier ones that have been introduced to price plain vanilla calls and puts they are imposing strong assumptions on the distributional properties of the underlying variables in contrast this study adopts a methodology that relaxes such restrictions following barone adesi g bourgoin f giannopoulos k 1998 don t look back risk 11 august 100 104 barone adesi g engle r mancini l 2004 garch options in incomplete markets mimeo university of applied sciences of southern switzerland long x 2004 semiparametric multivariate garch model mimeo university of california riverside multivariate pathways for a set of underlying variables are constructed before the option payoffs are computed this enables the covariances in addition to the means and variances to be modelled in a dynamic and nonparametric manner the model is particular suitable for options whose payoffs depend on variables that are characterised by high nonlinearities and extremes and on higher order multivariate options whose underlying variables are more unlikely to conform to a common theoretical distribution

regional disparities in the unemployment rate the role of the wage setting mechanism in spain 1987 92 bande r fernandez m and montuenga v m 2007 regional disparities in the unemployment rate the role of the wage setting mechanism in spain 1987 92 regional studies 41 the aim of this paper is to show how regional unemployment disparities in spain widen during economic upturns and to provide an explanation of this behaviour the analysis is based on the study of the wage setting mechanism that allows an estimation of the responses of wages to both labour productivity and the general situation of the labour market and an assessment of their impact on the evolution of regional unemployment the results of this estimation at the regional level with manufacturing data confirm the existence of marked differences between industries and between regions these responses these differences can be interpreted as a distinctive wage setting mechanism across industries and regions which may explain the evolution of unemployment rates within the regional labour markets bande r fernandez m et montuenga v

empirical martingale simulation for asset prices this paper proposes a simple modification to the standard monte carlo simulation procedure for computing the prices of derivative securities the modification imposes the martingale property on the simulated sample paths of the underlying asset price this procedure is referred to as the empirical martingale simulation ems the ems ensures that the price estimated by simulation satisfies the rational option pricing bounds the ems yields a substantial error reduction for the price estimate and can be easily coupled with the standard variance reduction methods simulation studies are conducted for european and asian call options using both the black and scholes and garch option pricing frameworks the results indicate that the ems yields substantial variance reduction particularly for in and at the money or longer maturity options the option price estimate based on the ems is found to exhibit a minor small sample bias only in few occasions an analysis of the trade off between computing time and price accuracy reveals that the ems dominates the conventional simulation methods

a quick algorithm for pricing european average options an algorithm is described that prices european average options the algorithm is tested against monte carlo estimates and is shown to be accurate the speed of the algorithm is comparable to the black scholes algorithm a closed form solution is derived for european geometric average options

a valuation formula for ldc debt a large gap may lie between the amount of debt relief that is nominally granted to a debtor and that which is actually given up by the creditors to help put that gap in perspective the author proposes a valuation formula that provides i the price at which a buy back of the debt on the secondary market is advantageous to the country ii the value to creditors of having the flows of payment guaranteed against factors that hinder a country in servicing its debt and iii the degree of tradeoff between growth of payments and levels of payments the author argues that it is not good business for a country to announce its intention to buy back debt because doing so immediately raises the price the value of guarantees the author argues cannot exceed 25 percent of the market price of the debt typically they re worth only about 10 percent as for the degree of tradeoff the author s formula finds that 1 percent additional growth rate is worth a 15 percent increase in the flows of payments an assessment of the mexican debt relief agreement reached in 1990 is also offered

pricing european average rate currency options abstract this paper develops a simple methodology that yields closed form analytical approximations for valuing european option claims involving the arithmetic average of future foreign exchange rates the main advantage of the approach is that it avoids the need to adopt time consuming numerical procedures the precision of the resulting formula and the distributional assumption that underlies it is examined by way of monte carlo simulations jel f31

a generalised wage rigidity result abstract this paper provides an alternative explanation of the empirically observed wage rigidity in industrialized economies we provide sufficient conditions under which the negotiated wage in unionized imperfectly competitive industries is independent of a number of product market features as well as of the bargaining institution right to manage or efficient bargains as long as negotiations are centralised at the industry level the wage rate turns out to be the same independently of e g the number of firms the degree of product substitutability or the intensity of market competition and this result is shown to hold in a broad class of industry specifications widely used in the literature

lag length selection and tests of granger causality between money and income one of the most widely accepred relationships in macroeconomics is the positive relationship between the rate of growth of the money supply and the rate of growth of income a diversity of opinion arises however with the attempt to identify a causal relationship between these variables while friedman and schwartz 1963 initiated the empirical investigation of money income causality sims 1972 made the most significant contribution to this literature with a practical application of the criterion developed by granger 1969 for identifying a causal relationship since the appearance of sims s approach and an alternative one advanced by sargent 1976 many researchers have applied these techniques to the investigation of the causal relationship between money and income l with two exceptions hsiao 1981 and mcmillin and fackler 1984 these researchers have arbitrarily chosen the lengths of their distributed lags the purpose of this paper is to test for granger causality between money and income this paper differs from previous work in that considerably more attention is focused on the effect of the lag specification on the test results in particular we investigate the extent to which rules of thumb arbitrary lag specifications and

a dynamic programming procedure for pricing american style asian options pricing european style asian options based on the arithmetic average under the black and scholes model involves estimating an integral a mathematical expectation for which no easily computable analytical solution is available pricing their american style counterparts which provide early exercise opportunities poses the additional difficulty of solving a dynamic optimization problem to determine the optimal exercise strategy a procedure for pricing american style asian options of the bermudan flavor based on dynamic programming combined with finite element piecewise polynomial approximation of the value function is developed here a convergence proof is provided numerical experiments illustrate the consistency and efficiency of the procedure theoretical properties of the value function and of the optimal exercise strategy are also established

a pricing method for options based on average asset values abstract in this paper we present a new strategy for pricing average value options i e options whose payoff depends on the average price of the underlying asset over a fixed period leading up to the maturity date such options are of particular interest and importance for thinly traded assets e g crude oil since price manipulation is inhibited and both the investor and issuer enjoy a welcome degree of protection from the vagaries of the market these options are often implicit in a bond contract although they also appear in a straightforward form our results suggest that the price of an average value option will always be lower than that of a standard european option our pricing strategy involves monte carlo simulation with variance reduction elements and offers an enhanced pricing method to both arbitragers and hedgers as well as to the issuers of such bonds

mexico stabilization debt and growth mexico rudiger dornbusch mexico today is at a crossroads as the de la madrid presidency which has been dominated by the debt crisis comes to an end a number of major policy difficulties remain inflation is still a problem and the continuation of stagnation in a country where the population grows by 3 a year is clearly unsustainable the outlook for inflation is dependent on the government s ability to keep its budget under control the stabilization programme has been quite successful in this respect but the cost in terms of foregone growth is staggering the issue here is how to collect the disinflation benefits of policy restraint analysing the peculiar process of rapid inflation both in mexico and elsewhere the author calls for an incomes policy as for growth it is closely linked to the external situation mexico which triggered the debt crisis in 1982 has made remarkable progress in achieving a non interest current account surplus yet its external debt remains huge and requires a continuation of net transfers abroad the experience though is that debt service comes at the expense of productive investment and growth the author proposes to escape from the unacceptable choice between debt service and growth by adopting what he calls interest rescheduling a debt equity swap applied to interest payments rather than to the principal

monte carlo methods for security pricing the monte carlo approach has proved to be a valuable and flexible computational tool in modern finance this paper discusses some of the recent applications of the monte carlo method to security pricing problems with emphasis on improvements in efficiency we first review some variance reduction methods that have proved useful in finance then we describe the use of deterministic low discrepancy sequences also known as quasi monte carlo methods for the valuation of complex derivative securities we summarize some recent applications of the monte carlo method to the estimation of partial derivatives or risk sensitivities and to the valuation of american options we conclude by mentioning other applications

real and perceived losses from unemployment a cross country study this article compares the unemployment rate ur as a measure of inefficiency with several other potential measures across 18 organization for economic co operation and development oecd countries results show that the ur is not a very good measure of relative inefficiency between countries it overestimates the number of individuals who would get jobs if the market is clear the dead weight losses dwls of ur are remarkably low even in high unemployment countries and the aggregate perceived monetary losses by the unemployed as a proportion of gross domestic product gdp are also uniformly low although inframarginal individuals in some countries may perceive their losses to be high

entrepreneurship social mobility and income redistribution in south india development economists have been preoccupied with the problem of increasing the size of the gnp pie to the relative neglect of its distribution despite the recent disenchantment with the viewpoint that all classes share in the benefits of industrial growth empirical data on the distribution of income business opportunity and economic power are in short supply many of the studies on entrepreneurship and economic development when they are not apologetics for ruthless capitalist exploitation as paul baran suggests extol the achievements of the capitalist entrepreneur without examining class origins and monopoly advantage joseph schumpeter sees entrepreneurs irrespective of class origin as heroic figures with the dream and will to found a private kingdom to conquer adversity to achieve success for its own sake and to experience the joy of creation for gustav papanek 1967 the private entrepreneur who is frugal diligent far sighted remarkably able and willing to take political risks is in large part responsible for the success of pakistan in achieving rapid industrialization

macroeconomic performance and collective bargaining an international perspective this paper critically reviews the research on how collective bargaining systems influence macroeconomic performance in industrialized countries the review considers effects of bargaining level coordination and corporatist institutional arrangements key empirical results turn out to be quite fragile and much of the paper explores issues of measurement and specification that account for the fragility the paper concludes that complementarities between key institutions and between institutions and the economic environment may be more important for macroeconomic performance than the effects of individual institutions and it suggests research strategies

money velocity causality detection evidence from some developing countries abstract this paper is an attempt to test friedman s hypothesis that the variability of money growth causes velocity to change the granger causality method is applied to test this hypothesis using quarterly data from 1974 i to 1985 iv for seven developing countries indonesia nigeria qatar kuwait saudi arabia the united arab emirates and venezuela these countries are characterized by relatively narrow but expanding money markets

quantity restrictions on advertising commercial media bias and welfare abstract we study the welfare effect of a quantity restriction on advertising in free to air television and other advertising financed media in the presence of commercial media bias broadcasters face a trade off between increasing the number of viewers by sending content that is highly valued by viewers and increasing the price of advertising by choosing advertiser friendly content a cap on advertising drives the per viewer price of ads up thus content improves for viewers therefore the cap can be welfare enhancing even when viewers are not ad averse competition among broadcasters makes it more likely that a cap on advertising improves welfare thus there is a complementarity between regulation and competition on this market we also show that a tax on advertising revenues has quite different effects than a cap on advertising quantity

recent experience with commercial bank debt reduction has the menu outdone the market abstract debt reduction at market terms has been criticized as too expensive from the point of view of the debtor the recent reduction agreements following the menu approach are partially concerted but they also possess some elements of voluntariness this raises two issues a what is the conceptual justification for such financial arrangements and b based on recent evidence to what extent have these arrangements reduced the cost of debt reduction in a review of six recent menu driven debt reduction agreements we find that the debtors achieved a far better financial result than would have been feasible with simple market buybacks

the 1990 mexico and venezuela recapture clauses an application of average price options abstract the paper prices contingent contracts and options written on average prices and uses the methodology to value the recapture clauses in the 1990 mexican and venezuelan debt restructuring agreements it is shown that the current values of the recapture clauses are less than one quarter of the maximum contractually possible and are a concave function of the standard deviation of the oil price the paper also points out that the benefits of recapture clauses are not only an increased degree of risksharing between countries and creditors but also a decrease in the likelihood of the debtor to default and an increased incentive to invest and adjust

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

options on the minimum or the maximum of two risky assets analysis and applications this paper provides analytical formulas for european put and call options on the minimum or the maximum of two risky assets the properties of these formulas are discussed in detail options on the minimum or the maximum of two risky assets are useful to price a wide variety of contingent claims of interest to financial economists applications discussed in this paper include the valuation of foreign currency debt option bonds compensation plans risk sharing contracts secured debt and growth opportunities involving mutually exclusive investments

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

pricing discretely monitored asian options under levy processes we present methodologies to price discretely monitored asian options when the underlying evolves according to a generic levy process for geometric asian options we provide closed form solutions in terms of the fourier transform and we study in particular these formulas in the levy stable case for arithmetic asian options we solve the valuation problem by recursive integration and derive a recursive theoretical formula for the moments to check the accuracy of the results we compare the implementation of our method to monte carlo simulation implemented with control variates and using different parametric levy processes we also discuss model risk issues

the provision of public goods via advertising existence of equilibria and welfare analysis abstract this paper considers an economy where a public good is provided via advertising the consumers preferences are represented using the characteristics approach and the advertising has a potentially enhancing effect on the characteristics content of a given commodity we define competitive equilibria and show they exist the welfare properties of the resulting allocations are analyzed and conditions for over and under production of the public good are provided

monetary variability united states and japan note many economists have criticized the federal reserve because of the high variability of monetary growth in the united states since the change in operating procedures on october 6 1979 chairman paul volcker has responded to this criticism in congressional testimony november 19 1980 and in a letter to senator garn february 18 1982 by asserting that international comparisons all appear to demonstrate the same point u s monetary aggregates rank at or near the top of the league in terms of low variability and this is true even allowing for the technical difficulties involved in making such international comparisons

the valuation of path dependent contracts on the average this article values option contracts based on the average price realized over a finite time horizon such contracts are of importance to traders who periodically transact in spot markets and who require protection from adverse moves in their total accrued costs realized over their trading horizons explicit valuation models for pricing a variety of path dependent contracts based on geometric and arithmetic averages are developed the early exercise features of american contracts are investigated and it is shown that this feature has significant value

the pricing of forward starting asian options abstract asian options are path dependent options whose payoff is based on an average in some cases the underlying asset of the option is an average in others the strike price itself is computed as an average of the underlying asset recent prices asian currency options as an example allow corporate users to cover seasonal and so called strategic foreign exchange positions averages are also found in some recent warrant issues where they are mostly used as poison pills to preclude hostile takeovers this paper derives a closed form solution for the valuation of european asian options whose strike price is an average both plain vanilla average options i e those for which the time interval taken into account for the strike average calculation is the life of the option and forward starting average options are considered the valuation formula is obtained by relying upon a slight linear approximation although some previous contributions in the literature already use approximation techniques our approach contrary to others allows the derivation of a formal upper bound to the approximation error the numerical values given by this formula are then compared to those generated by an antithetic variate monte carlo method based on this comparison and the computation of an upper bound to the approximation error it is shown that the closed form solution performs quite well and is obviously computationally efficient

autoregressive modelling and money income causality detection abstract a step wise procedure based on granger s concept of causality and abaike s final prediction error criterion is suggested as a practical means to identify the order of lags of each variable in a multivariate autoregressive process the model seems useful because it can serve as a reduced form formulation to avoid imposing often spurious or false restrictions of the model it also provides a reasonably powerful test of causality the idea is applied to u s postwar money and income data it is found that between m1 and gnp a bivariate feedback model fits the data best between m2 and gnp a one way causal model from money to income performs better diagnostic checks applied to our model seem to indicate the adequacy of our approach

a p d e approach to asian options analytical and numerical evidence abstract we first derive a one state variable partial differential equation easy to implement which characterizes the price of a european type asian option this result is explained and related to previous literature we then derive new results on the hedging of an asian option and propose analytical and numerical analysis on the comparison between asian and european options our methodology which applies to fixed strike asian options as well as to floating strike asian options completes and clarifies various results in the literature in this paper we focus on backward starting asian options our approach is quite general however and we explain how to adapt our main results to the case of forward starting asian options

the meaning of internal balance thirty years on in his nobel prize lecture meade advocated allocating demand management policies to pursuing price stability reformed wage fixing institutions to achieving full employment and foreign exchange policies to maintaining balance of payments equilibrium but with respect to the first he advocated a target for nominal income rather than the price level i evaluate meade s programme with the benefit of hindsight and in the light of experience with inflation targets i also discuss some of the issues associated with the application of flexible inflation targets as well as the extent to which financial stability considerations should affect the conduct of monetary policy

small dimension pde for discrete asian options abstract this paper presents an efficient method for pricing discrete asian options in presence of smile and non proportional dividends using an homogeneity property we show how to reduce an n 0 dimensional problem to a one or two dimensional one we examine different numerical specifications of our dimension reduced pde using a crank nicholson method interpolation method grid boundaries time and space steps as well as the extension to the case of non proportional discrete dividends using a jump condition we benchmark our results with quasi monte carlo simulation and a multi dimensional pde

secondary market prices and mexico s brady deal analyzes wether or not the use of official funds in debt reduction packages as in mexico s 1989 brady deal is tantamount to a creditor bailout review of events option pricing approach to sovereign debt valuation market valuation of the brady debt package positive impact of brady plan on debt relief

pricing a class of american and european path dependent securities path dependent securities depend on current and past values of underlying state variables consequently the usual backward evaluation technique is difficult to apply since state variable values existing earlier in real time are unknown this paper develops a series of propositions which makes possible the pricing of a certain class of both american and european versions of these path dependent securities

trade reform aggregate investment and capital flight on credibility and the value of information abstract in this paper we demonstrate that uncertainty about future policy reversals coupled with irreversible investment confers an option value to foreign exchange and may lead to capital flight and a fall in aggregate investment after a trade reform the analysis focuses on the value of information and the credibility of the policy reform the conclusion points to a potential role for international institutions to prevent such problems

debt relief and economic growth in mexico could external restraint and internal balance in mexico have been reconciled at levels of savings and investment that allowed satisfactory growth in output without the 1989 90 restructuring of debt what are the likely implications of mexico s brady deal on economic growth what are the macroeconomic effects of debt equity swaps this article develops and estimates a model to address these issues the analysis concludes that the 1989 90 agreement in mexico will contribute materially to macroeconomic stability and the restoration of economic growth copyright 1991 by oxford university press

fiscal stabilizations when do they work and why abstract this paper studies the determinants and channels through which fiscal contractions influence the dynamics of the debt to gdp ratio and gdp growth using data from a panel of oecd countries the paper shows that the success of fiscal adjustments in decreasing the debt to gdp ratio depends on the size of the fiscal contraction and less on its composition the rate of growth of output matters too but higher gdp growth does not drive the success of a fiscal stabilization in contrast whether a fiscal adjustment is expansionary depends largely on the composition of the fiscal maneuvre in particular stabilizations implemented by cutting public spending lead to higher gdp growth rates the effects of the composition on growth work mostly through the labor market rather than through agents expectations of future fiscal policy finally the evidence suggests that successful and expansionary fiscal contractions are not the result of accompanying expansionary monetary policy or exchange rate devaluations

a valuation model for developing country debt with endogenous rescheduling creditors have little recourse if a sovereign state repudiates debt obligations they can however threaten to impose penalties if such action occurs which results in deadweight losses to the system as a whole a preferred alternative for both borrower and lender is to reconstruct debt obligations reschedulings are a device that creditors can use to restructure the incentives faced by borrowers such that repudiation is never a rational action this article develops a numerical method of valuing the option to reschedule the model shows why fees are preferred to higher interest spreads during a rescheduling exerise why maturities get shorter prior to a debt crisis but are lengthened in a rescheduling and why little has been done to attempt to seize the assets of countries that have not repaid any interest or principal for extended periods of time the model shows that lenders are willing to commit greater amounts if reschedulings are possible than if they are not and that precommitment to provide additional funds at rescheduling can raise the market value of existing debt and should not be construed as concessions by commercial lenders alternately the model can be used to improve systems for ranking country creditworthiness to assess the degree of adjustment requried to spark resumption of spontaneous lending or to estimate how much interest rates would have to fall to restore a country s creditworthiness

sovereign liquidity crises the strategic case for a payments standstill is sovereign borrowing so different from corporate debt that there is no need for bankruptcy style procedures to protect debtors with the waiver of immunity sovereign debtors who already face severe disruption from short term creditors grabbing their currency reserves are also exposed to litigious creditors trying to seize what assets they can in a race of the vultures shielding sovereign debtors from inter creditor conflict by authorised standstills on payments doubt less runs some risk of debtor s moral hazard but the lack of an orderly procedure for resolving sovereign liquidity crises means that the imf is de facto forced to bail out countries in trouble this leads to both debtor and creditor moral hazard as investors lend without monitoring knowing that their investments are essentially guaranteed the strategic case for legalising standstills is to rescue the international financial system from this time consistent trap

jump processes in commodity futures prices and options pricing empirical evidence shows that log return relatives on commodity futures prices are not normally distributed this departure from normality seems to be caused by large price changes occurring in the commodity markets with the arrival of important new information this suggests that a jump diffusion model may be a plausible choice for modeling the stochastic process underlying commodity option prices merton 1976a develops a jump diffusion option pricing model assuming that jump risk is unsystematic however the jump diffusion model developed by bates 1991 is more appropriate for commodity option pricing since it allows jump risk to be systematic in this article recent transactions data on futures and futures options are used to test out of sample options using american versions of black s diffusion and bates s jump diffusion models the results show that bates s model performs considerably better than black s model jump diffusion asian option prices are also shown to differ considerably from geometric brownian motion asian option prices

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

collective wage bargaining and the role of institutional stability a cross national comparison of macroeconomic performance since the advent of the economic crisis interest in the efficacy of collective wage bargaining institutions has increased as the labour market was required to bear the burden of economic adjustment and became an important policy field for institutional reform in many countries in this article the role of institutional stability trust and certainty for the efficacy of collective bargaining systems is investigated and their effects on macroeconomic outcomes inflation and unemployment are analysed we argue that stability of the institutional framework of collective bargaining is of major importance for its efficacy as it reduces uncertainty and provides the necessary basis for trust among bargaining actors thus we hypothesise that institutional change and instability are associated with significant transaction costs and have at least temporarily negative effects on economic outcomes the hypotheses are confirmed by an empirical analysis which uses data of 34 industrialised countries from 1965 to 2014

asian and australian options a common perspective we show that australian options are equivalent to fixed or floating strike asian options and consequently that by studying asian options from the australian perspective and vice versa much can be gained one specific application of this australian approach leads to a natural dimension reduction for the pricing pde of asian options with or without stochastic volatility featuring time independent coefficients another application lies in the improvement of monte carlo schemes where the australian approach results in a path independent method we also show how the milevsky and posner 1998 result on the reciprocal approximation for asian options can be quickly obtained by using the connection to australian options further we present an analytical exact pricing formula for australian options and adapt a result of carr et al 2008 to show that the price of an australian call option is increasing in the volatility and by doing this answering a standing question by moreno and navas 2008

market competition and strike activity we develop a model of wage bargaining with private information in a duopoly we investigate how product differentiation and market competition bertrand vs cournot competition affect wages and strikes if bargaining takes place at the industry level then both the wage outcome and the strike activity do not depend on the degree of product differentiation whatever the type of market competition however if bargaining takes place at the firm level then wages and strikes are increasing with the degree of product differentiation and the strike activity is smaller under bertrand than under cournot competition

a multisectorial matching model of unions abstract we develop an equilibrium matching model where unions have an important institutional presence monopolistic competition characterizes the goods market where only some sectors are unionized thus the model can vary the coverage of collective bargaining it can vary the degree of coordination between unions and alternatively consider national and sectorial unions calibration to the union premium implies a workers rent extraction parameter much lower than assumed in the matching literature we introduce unemployment insurance to study the interactions of policies with unions and find that unions only push for more generous benefits if this does not entail higher payroll taxes

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

valuing target price support programs with average option pricing the u s government deficiency payment program supplements farm income by transferring income from taxpayers to farmers when revenue lost due to the acreage restriction exceeds revenue gained from participating in the program farmers lose money by participating therefore measuring expected revenue from the government program is important so that farmers can decide whether to participate in the program this study uses a garch average option pricing model and the black average option pricing model to predict the implicit premium of the u s government deficiency payment program the average option pricing model considers the average price of the underlying asset over a fixed period a regression model based on the simulation results is provided so that the average option models can be easily used to project deficiency payments the results can be used by extension economists to help producers decide whether to participate in the program

unionization structure licensing and innovation we show the effects of the unionization structure viz decentralized and centralized unions on a firm s incentive for technology licensing and innovation the incentive for technology licensing is stronger under decentralized unions we identify circumstances under which the benefit from licensing creates a stronger incentive for innovation under decentralized unions if the union s preference for employment is high the benefit from licensing may create higher incentive for innovation under decentralized unions however if the union s preference for wage is high enough the incentive for innovation is higher under a centralized union irrespective of licensing ex post innovation if the centralized union decides whether or not to supply workers to all firms the possibility of higher innovation under decentralized unions increases we further show that perfectly substitutable workers can be better off under decentralized unions if the labor productivity depends on the unionization structure which occurs in our analysis when e g licensing after innovation occurs only under decentralized unions or innovation with no licensing occurs only under a centralized union

the causes of spanish unemployment a structural var approach abstract in this paper we review the main causes of spanish unemployment and weight them by estimating a simple macroeconomic model using the structural var methodology by using this methodology we associate different causes of unemployment with shocks of different nature which have long lasting effects due to full hysteresis we claim that such an extreme assumption on state dependency is reasonable at least as a local approximation for the period and the economy at hand our results suggest that the combination of a plausible mixture of different types of shock and extreme persistence in their propagation mechanisms can satisfactorily explain the dismal performance of the spanish labour market during the last two decades

spectral expansions for asian average price options arithmetic asian or average price options deliver payoffs based on the average underlying price over a prespecified time period asian options are an important family of derivative contracts with a wide variety of applications in currency equity interest rate commodity energy and insurance markets we derive two analytical formulas for the value of the continuously sampled arithmetic asian option when the underlying asset price follows geometric brownian motion we use an identity in law between the integral of geometric brownian motion over a finite time interval 0 t and the state at timet of a one dimensional diffusion process with affine drift and linear diffusion and express asian option values in terms of spectral expansions associated with the diffusion infinitesimal generator the first formula is an infinite series of terms involving whittaker functionsm andw the second formula is a single real integral of an expression involving whittaker functionw plus for some parameter values a finite number of additional terms involving incomplete gamma functions and laguerre polynomials the two formulas allow accurate computation of continuously sampled arithmetic asian option prices

theory and measurement of exotic options in u s agricultural support programs theoretical models are derived for pricing derivative market instruments with payoff structures identical to those implied by the deficiency findley and loan programs numerical approximation methods are used to obtain market premiums for the exotic contingent claims embedded in these types of programs the application focuses on a comparison of the value of traditional support programs for corn to that of an exchange put offered under the option pilot program the comparison provides measures of expected cost to the government and of the value of the programs to the producer