estimating the marginal law of a time series with applications to heavy tailed distributions this article addresses estimating parametric marginal densities of stationary time series in the absence of precise information on the dynamics of the underlying process we propose using an estimator obtained by maximization of the quasi marginal likelihood which is a likelihood written as if the observations were independent we study the effect of the neglected dynamics on the asymptotic behavior of this estimator the consistency and asymptotic normality of the estimator are established under mild assumptions on the dependence structure applications of the asymptotic results to the estimation of stable generalized extreme value and generalized pareto distributions are proposed the theoretical results are illustrated on financial index returns supplementary materials for this article are available online

a simplified jump process for common stock returns the specification of a statistical distribution which accurately models the behavior of stock returns continues to be a salient issue in financial economics with the introduction of arithmetic and geometric brownian motion models much attention has recently focused on a poisson mixture of distributions as an appropriate specification of stock returns for example see 12 3 8 10 5 and 1 consistent with empirical evidence these models yield leptokurtic security return distributions and furthermore the specification has much economic intuition in particular one may always decompose the total change in stock price into normal and abnormal components the normal change may be due to variation in capitalization rates a temporary imbalance between supply and demand or the receipt of any other information which causes marginal price changes this component is modelled as a lognormal diffusion process the abnormal change is due to the receipt of any information which causes a more than marginal change in the price of the stock and is usually modeled as a poisson process

day of the week effects and asset returns the number of empirical studies using daily stock returns is rapidly increasing researchers generally assume that the distribution of stock returns is identical for all days of the week a convenient statistical assumption but not a necessary condition of market equilibrium nevertheless there are reasons to suspect that the distribution of returns may vary according to the day of the week the most obvious is the impact of weekends on monday s return since monday s return is calculated over three instead of one calender day the mean and variance may well be higher on monday compared with any other daily return perhaps three times as large previous research has examined the daily distribution of stock returns for a monday effect while fama 1965 does not compare daily mean returns he does report that monday s variance is about 20o greater than other daily returns with a traditional distributional assumption regarding the returns on a financial asset specifies that the expected returns are identical for all days of the week contrary to this plausible assumption this paper discovers that the expected returns on common stocks and treasury bills are not constant across days of the week the most notable evidence is for monday s returns where the mean is unusually low or even negative several explanations of the results are investigated but none proves satisfactory aside from documenting significant day of the week effects the implications of the results for tests of market efficiency are examined while market adjusted returns continue to exhibit day of the week effects these effects are no longer concentrated on monday during the last year we have had many conversations with our colleagues throughout the professions we are particularly thankful to the participants at sessions of the western and american finance associations where preliminary versions of this paper were presented special thanks are due to gene fama gailen hite jon ingersoll robert jarrow merton miller clifford smith and rex thompson the expert research assistance of frank rabinovitch and youngsup yun is gratefully acknowledged 1 the list of papers using daily stock returns is too long to name recent examples include charest 1978 dodd 1980 banz 1981 and reinganum 1981

option pricing when the variance changes randomly theory estimation and an application in this paper we examine the pricing of european call options on stocks that have vari ance rates that change randomly we study continuous time diffusion processes for the stock return and the standard deviation parameter and we find that one must use the stock and two options to form a riskless hedge the riskless hedge does not lead to a unique option pricing function because the random standard deviation is not a traded security one must appeal to an equilibrium asset pricing model to derive a unique option pricing function in general the option price depends on the risk premium associated with the random standard deviation we find that the problem can be simplified by assuming that volatility risk can be diversified away and that changes in volatility are uncorrelated with the stock return the resulting solution is an integral ofthe black scholes formula and the distribution function for the variance of the stock price we show that accurate option prices can be computed via monte carlo simulations and we apply the model to a set of actual prices

the capital structure and investment decisions of the small owner managed firm some exploratory issues in the burgeoning literature on small firm financing the problem of underidentification in respect to the supply of and demand for capital has not been fully resolved in an attempt to progress this issue the current paper looks at some of the issues influencing the demand for finance in small firms which are owner managed the paper is primarily exploratory in nature and argues that a greater emphasis might usefully be placed on the cost of capital dimension in future research into small business financing in particular it is suggested that where the objective of an owner manager is to maintain control of the firm interdependent investment and financing strategies may be chosen to control the small firms cost of capital this in turn indicates that the tendency for some small firms to invest sub optimally and exhibit slower than average growth may not be primarily determined by limitations on their supplies of finance on the demand side it may well be that in addition to equity aversion a suboptimal capital structure decision is made in the form of a reduced demand for debt in other words given the level of equity that an owner manager chooses debt may not be fully expanded to the capacity limit consistent with value maximisation

hedge funds the good the bad and the lucky we develop an estimation approach based on a modified expectation maximization em algorithm and a mixture of normal distributions associated with skill groups to assess performance in hedge funds by allowing luck to affect both skilled and unskilled funds we estimate the number of skill groups the fraction of funds from each group and the mean and variability of skill within each group for each individual fund we propose a performance measure combining the fund s estimated alpha with the cross sectional distribution of fund skill in out of sample tests an investment strategy using our performance measure outperforms those using estimated alpha and t statistic

models of stock returns a comparison in this paper a discrete mixture of normal distributions is proposed to explain the observed significant kurtosis fat tails and significant positive skewness in the distribution of daily rates of returns for a sample of common stocks and indexes stationarity tests on the parameter estimates of this discrete mixture of normal distributions model revealed significant differences in the mean estimates that can explain the observed skewness and significant differences in the variance estimates that can explain the observed kurtosis an alternative explanation for the observed fat tails is the symmetric student model the result of a comparison between the models is that the discrete mixture of normal distributions model has substantially more descriptive validity than the student model for many years both financial economists and statisticians have been concerned with the description of stock market returns the form of the distribution of stock returns is a crucial assumption for mean variance portfolio theory theoretical models of capital asset prices and the prices of contingent claims for example understanding the behavior of the variance is essential to option pricing models empirical tests of asset pricing models and the efficient markets hypothesis draw statistical inferences that are also conditional on distributional assumptions the most convenient assumption for financial theory and empirical methods is that the distribution of security rates of return be multivariate normal with parameters that are stationary over time since the normal distribution is stable under addition any arbitrary portfolio of stocks will also be normally distributed with the additional assumption of risk aversion mean variance theory follows furthermore the assumptions of normality and parameter stationarity are required for most of the econometric techniques typically used in empirical research tests of the normality hypothesis on the daily returns of the dow jones industrial stocks by fama 121 revealed more kurtosis fatter tails than that predicted from a sample of independent and identically distributed normal variates fama concluded from this evidence that the distribution of price changes conforms better to the stable paretian distribution with characteristic exponent

oil prices brownian motion or mean reversion a study using a one year ahead density forecast criterion abstract for oil related investment appraisal an accurate description of the evolving uncertainty in the oil price is essential for example when using real option theory to value an investment a density function for the future price of oil is central to the option valuation the literature on oil pricing offers two views the arbitrage pricing theory literature for oil suggests geometric brownian motion and mean reversion models empirically driven literature suggests arma garch models in addition to reflecting the volatility of the market the density function of future prices should also incorporate the uncertainty due to price jumps a common occurrence in the oil market in this study the accuracy of density forecasts for up to a year ahead is the major criterion for a comparison of a range of models of oil price behaviour both those proposed in the literature and following from data analysis the kullbach leibler information criterion is used to measure the accuracy of density forecasts using two crude oil price series brent and west texas intermediate wti representing the us market we demonstrate that accurate density forecasts are achievable for up to nearly two years ahead using a mixture of two gaussians innovation processes with garch and no mean reversion

option valuation with systematic stochastic volatility we use an extension of the equilibrium framework of rubinstein 1976 and brennan 1979 to derive an option valuation formula when the stock return volatility is both stochastic and systematic our formula incorporates a stochastic volatility process as well as a stochastic interest rate process in the valuation of options if the mean volatility and covariance processes for the stock return and the consumption growth are predictable our option valuation formula can be written in preference free form further many popular option valuation formulae in the literature can be written as special cases of our general formula in this paper we investigate the valuation of individual stock options when the volatility of the underlying stock return is stochastic and has a systematic component which is related to the stochastic volatility of the consumption growth or the market return such an investigation is timely and of significant interest because there is now a considerable amount of evidence that the volatility of stock prices is not only stochastic but that it is also highly correlated with the volatility of the market as a whole for example see black 1975 conrad kaul and gultekin 1991 jarrow and rosenfeld 1984 jorion 1988 and ng engle and rothschild 1992 furthermore empirical work by black and scholes 1972 gultekin rogalski and tinic 1982 and whaley 1982 has shown that the empirical biases inherent in the black scholes option prices are different for options on high and low risk stocks because low risk stocks are mainly large firm stocks with stochastic return volatilities that are highly correlated with the return volatility of the market and high risk stocks are mainly small firm stocks with a lessimportant systematic volatility component incorporating systematic volatility effects in option valuation models has the potential to reduce the empirical biases exhibited by prices computed from the black scholes formula we use equilibrium arguments that extend the consumption based representative agent framework of rubinstein 1976 brennan 1979 and stapleton and subrahmanyam 1984 to allow individual asset returns and the consumption growth to exhibit stochastic volatility in particular we permit the volatility of individual asset returns to consist of a systematic component that is related to the consumption or market volatility in addi

rolling sampled parameters of arch and levy stable models in this paper an asymmetric autoregressive conditional heteroskedasticity arch model and a levy stable distribution are applied to some well known financial indices dax30 ftse20 ftse100 and sp500 using a rolling sample of constant size in order to investigate whether the values of the estimated parameters of the models change over time although there are changes in the estimated parameters reflecting that structural properties and trading behaviour alter over time the arch model adequately forecasts the one day ahead volatility a simulation study is run to investigate whether the time variant attitude holds in the case of a generated arch data process revealing that even in that case the rolling sampled parameters are time varying

mean var portfolio optimization a nonparametric approach portfolio optimization involves the optimal assignment of limited capital to different available financial assets to achieve a reasonable trade off between profit and risk we consider an alternative markowitz s mean variance model in which the variance is replaced with an industry standard risk measure value at risk var in order to better assess market risk exposure associated with financial and commodity asset price fluctuations realistic portfolio optimization in the mean var framework is a challenging problem since optimizing var leads to a non convex np hard problem which is computationally intractable in this work an efficient learning guided hybrid multi objective evolutionary algorithm mode gl is proposed to solve mean var portfolio optimization problems with real world constraints such as cardinality quantity pre assignment round lot and class constraints a learning guided solution generation strategy is incorporated into the multi objective optimization process to promote efficient convergence by guiding the evolutionary search towards promising regions of the search space the proposed algorithm is compared against the non dominated sorting genetic algorithm nsga ii and the strength pareto evolutionary algorithm spea2 experimental results using historical daily financial market data from s p 100 and s p 500 indices are presented experimental results shows that mode gl outperforms two existing techniques for this important class of portfolio investment problems in terms of solution quality and computational time the results highlight that the proposed algorithm is able to solve the complex portfolio optimization without simplifications while obtaining good solutions in reasonable time and has significant potential for use in practice

canada s demand for third world highly trained immigrants 1976 86 abstract immigration to canada after a major policy change in 1978 which favored the family reunification class has been dominated by third world immigrants these immigrants continue to be a significant source of highly trained individuals for canada using an excess demand model to estimate the determinants of demand this paper finds that the supply of domestic graduates occupational income and the previous periods immigration level are major variables that influence canada s demand for skilled immigrants thus it is argued that the movement in these variables primarily guides canadian immigration policy toward skilled immigrants

leading issues of fact and theory factual and theoretical issues concerning recent u s immigration trends are examined with a focus on renewed interest in the subject among economists migration from rich and from poor countries is compared the impact on the united states in terms of employment opportunities wages and working conditions is discussed annotation

a new foundation for the mean variance analysis abstract in this paper i re examine how the mean variance analysis is consistent with its traditional theoretical foundations namely stochastic dominance and the expected utility theory then i propose a simplified version of the coarse utility theory as a new foundation i prove that by assuming risk aversion and the normality of asset variables the simplified model is well behaved indifference curves are convex and the opportunity set is concave therefore there exist global optimal portfolios in the market finally i prove that decision making in accordance with the simplified model is consistent with the mean variance analysis

the term structure of credit spreads with jump risk abstract default risk analysis is important for valuing corporate bonds swaps and credit derivatives and plays a critical role in managing the credit risk of bank loan portfolios this paper offers a theory to explain the observed empirical regularities on default probabilities recovery rates and credit spreads it incorporates jump risk into the default process with the jump risk a firm can default instantaneously because of a sudden drop in its value as a result a credit model with the jump risk is able to match the size of credit spreads on corporate bonds and can generate various shapes of yield spread curves and marginal default rate curves including upward sloping downward sloping flat and hump shaped even if the firm is currently in a good financial standing the model also links recovery rates to the firm value at default so that the variation in recovery rates is endogenously generated and the correlation between recovery rates and credit ratings before default reported in altman j finance 44 1989 909 can be justified

conditional heteroscedasticity in time series of stock returns evidence and forecasts this article presents new evidence about the time series behavior of stock prices daily return series exhibit significant levels of second order dependence and they cannot be modeled as linear white noise processes a reasonable return generating process is empirically shown to be a first order autoregressive process with conditionally heteroskedastic innovations in particular generalized autoregressive conditional heteroskedastic garch 1 1 processes fit to data very satisfactorily various out of sample forecasts of monthly return variances are generated and compared statistically forecasts based on the garch model are found to be superior copyright 1989 by the university of chicago

the risk in hedge fund strategies theory and evidence from trend followers hedge fund strategies typically generate option like returns linear factor models using benchmark asset indices have difficulty explaining them following the suggestions in glosten and jagannathan 1994 this article shows how to model hedge fund returns by focusing on the popular trend following strategy we use lookback straddles to model trend following strategies and show that they can explain trend following funds returns better than standard asset indices though standard straddles lead to similar empirical results lookback straddles are theoretically closer to the concept of trend following our model should be useful in the design of performance benchmarks for trend following funds

a data analytic look at skewness and elongation in common stock return distributions this article explores the nature of skewness and elongation in daily common stock return distributions of individual firms using estimates of g for skewness and h for elongation obtained from tukey s g and h distributions both parametric and nonparametric bootstrap estimates of standard errors of the g estimates are computed and compared daily return distributions are first examined cross sectionally over a large sample of firms the estimates of the skewness parameter exhibit variation across individual firms but some general trends are evident across industry groups and firm sizes return distributions typically seem to be more elongated than the gaussian distribution from a time series perspective both skewness and elongation are persistent in the return distributions of individual firms and vary over a finite range first order autocorrelation coefficients of monthly g and h estimates are large and suggest a certain degree of predictability

information time option pricing theory and empirical evidence abstract with a stochastic time change from calendar time to information time we derive a parsimonious option pricing formula with stochastic volatility as a risk neutral poisson sum of merton s 1973 prices over the option s information time maturity domain the formula contains two unobservable parameters information arrival intensity and information time asset volatility with stochastic volatility induced by random information arrival when the information arrival rate intensifies the option price increases and vice versa we test the formula in pricing hedging and excess profits capture empirically using currency and the s p 500 futures options transaction data

skewness in financial returns abstract in this paper the symmetry of daily returns is addressed in eight international stock markets and three spot exchange rates tests of symmetry with the sample skewness seem of little value due to the non normality of the returns under alternative non normal distributions the symmetry of the returns cannot be rejected for most markets distribution free procedures do not detect strong asymmetries in most of the series either however some differences between returns below the mean and returns over the mean are observed in several markets

two supply curves for economists implications of mobility and career attachment of women the pool of women with highly specialized trainiing is increasing and the tolerance of such women for accepting occupational seg regationi and narrow views of their career potentials is dimiiinishinig it is crucial that we understand the differences between lab or markets for men anid women at professionial levels the resulting differellces in career patterns and how barriers to full career development for women impinge on occupational rewards only then can we plani effcctively for the generation of younig womento come particularly important at this time is analysis of the market for h elds anid occupations that are atypical for women overall societal attitudes toward the proper role of women are evolving yet on the demand side employers perceived differences as to the employability of women whether real or imaginary result in barriers that vary in intensity by occupation economics a stereotypically male profession has relatively intense barriers for women on the demand side over and above variations in aggregate demand 1 the demand side barriers are different from those associated with stereotypically female occupations on the supply side barriers to full career development for women are likely to be those common to all professional occupations plus the effect of women s perceptions of the intensity of the demand side barriers for the particular profession i e any lack of support of male colleagues professional isolation and lack of access to information network or employers lack of perception of the women s career potential one group of supply side barriers includes presence of children husband s unfavorable attitudes guilt feelings of the women related to a high sense of responsibility for monitoring consumption at home and poor earlier education choices based on limited perception of career possibilities in addition the two probably most important are geographic mobility or immobility related to demands of family and lack of the on the job training caused by either gaps in the women s career patterns or diminished opportunities for investment in human capital for women when working the purposes of this paper are to use preliminary data from the committee on the status of women in the economics profession cswep american economic association aea 1974 75 survey of economists to test a model showing that two supply curves exist for economists instead of one with the division related to nonpecuniary returns for women and then consider whether more than two supply curves should be formulated to allow for whether workers are major earners in the family equal earners or secondary earners 2 the model used as a starting point professor of economics southern methodist university i wvant to thank patricia kirby and anna fay ifriedlander for help in computing and prograimming 1 for a qualitative discussion of such barriers see kenneth e boulding and barbara b reagani 2 informationi on the sampling and survey procedure anid qualityof sample may be obtained from the author

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

jump diffusion option valuation in discrete time we develop a simple discrete time model to value options when the underlying process follows a jump diffusion process multivariate jumps are superimposed on the binomial model of cox ross and rubinstein 1979 to obtain a model with a limiting jump diffusion process this model incorporates the early exercise feature of american options as well as arbitrary jump distributions it yields an efficient computational procedure that can be implemented in practice as an application of the model we illustrate some characteristics of the early exercise boundary of american options with certain types of jump distributions jump diffusion processes are popular in option valuation models these processes were incorporated by merton 1976 into the theory of option valuation and constitute an important alternative to the lognormal diffusion process assumed in the black and scholes 1973 model in this paper we develop a tractable discrete time model for valuing options with these processes many authors have suggested that incorporating jumps in option valuation models may explain some of the large empirical biases exhibited by the black scholes model 1 however in many cases closed form solutions for valuing options are not available for example this is true when there is a positive probability of early exercise when the jump distribution is neither lognormal nor discrete or when the option is based on the term structure of interest rates see ahn and thompson 1988 and jarrow and madan 1991 in these important cases the model developed in this paper can be used to value options another aim of this paper is to provide a model which relies on only simple mathematics to price options with jump diffusion processes it is hoped that the key economic relationships underlying jump diffusion models are transparent in this model we provide enough details to make the procedure readily accessible

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on measuring skewness and elongation in common stock return distributions the case of the market index this article is an exploratory investigation of the distributional properties of market index returns using j w tukey s g and h distributions specifically it is shown that over sufficiently long periods of time the distribution of the market index is adequately explained as a skewed elongated g x h distribution estimates of skewness and elongation are developed that are easy to calculate and are robust with respect to outliers functional forms for the appropr iate distributions are provided the findings reported here have implications for understanding skewness and elongation developing appropriate portfolio strategies and devising pricing models incorporating higher moments copyright 1988 by the university of chicago

an econometric model of serial correlation and illiquidity in hedge fund returns the returns to hedge funds and other alternative investments are often highly serially correlated in sharp contrast to the returns of more traditional investment vehicles such as long only equity portfolios and mutual funds in this paper we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure i e investments in securities that are not actively traded and for which market prices are not always readily available for portfolios of illiquid securities reported returns will tend to be smoother than true economic returns which will understate volatility and increase risk adjusted performance measures such as the sharpe ratio we propose an econometric model of illiquidity exposure and develop estimators for the smoothing prole as well as a smoothing adjusted sharpe ratio for a sample of 908 hedge funds drawn from the tass database we show that our estimated smoothing coecien ts vary considerably across hedge fund style categories and may be a useful proxy for quantifying illiquidity exposure

some economic determinants of third world professional immigration to the united states 1972 87 abstract we estimate reduced form equations for immigration to the united states by engineers natural and social scientists and physicians from 18 third world countries explanatory variables include income real gdp growth graduation in the united states and study in each country of origin additional explanatory variables are foreign student enrollment in the united states lagged immigration total immigration from each country and a dummy variable which accounts for implementation of restrictions on permanent visas in 1972 1973 results generally conform to expectations but differ across occupations and with model specification most income statistics are unexpected however and the strong correlation of us income with graduation in the united states suggests that there is a simultaneity problem in models which include income because immigration appears to respond to labor shortages in the united states and surpluses in countries of origin our results suggest that us immigration quotas have not prevented third world professionals from responding to economic incentives

migration of professionals from fiji to new zealand a reduced form supply demand model abstract in this study we estimate a reduced form equation for migration of highly skilled and professionally trained workers from fiji to new zealand during 1987 1990 explanatory variables include previous period s migrants occupational income in new zealand the supply of graduates in new zealand and political instability in fiji using a reduced form supply demand model to estimate the determinants of migration the study finds that the number of professional migrants from fiji was significantly and positively related to previous year s migrants the real income in new zealand and political instability in fiji

the ex ante and ex post price effects of quarterly earnings announcements reflected in option and stock prices the subject of this study is the effect of investors anticipations of impending informative disclosures on the behavior of option and stock prices our approach introduced in a previous paper patell and wolfson 1979 and substantially extended here represents the following significant departure from traditional information content studies instead of analyzing security price reactions to announcements we analyze preannouncement option prices in order to discern investors beliefs about the range of possible stock price reactions expected to accompany a forthcoming disclosure whose actual content is not yet known in the tests reported here we focus on quarterly earnings announcements as disclosure events whose timing is predictable and we attempt to detect their systematic influence on the relationship between stock and option prices our operational definition of information content emphasizes changes in the variability of common stock returns in response to earnings disclosures while market efficiency precludes investors from predicting the direction of the stock price change which will accompany a future earnings announcement it is likely that investors will anticipate increased price variability at the time of disclosure and indeed several studies have documented announcement date increases in stock price volatility

multi period performance persistence analysis of hedge funds since hedge funds specify significant lock up periods we investigate persistence in the performance of hedge funds using a multi period framework in which the likelihood of observing persistence by chance is lower than in the traditional two period framework under the null hypothesis of no manager skill no persistence the theoretical distribution of observing wins or losses follows a binormial distribution we test this hypothesis using the traditional two period framework and compare the findings with the results obtained using our multi period framework we examine whether persistence is sensitive to the length of return measurement intervals by using quarterly half yearly and yearly returns we find maximum persistence at the quarterly horizon indicating that presistence among hedge fund managers is short term in nature

minute by minute efficiency normality and randomness in intra daily asset prices in this study we test the efficiency of asset markets at intervals as short as 30 seconds we also describe the properties of a simple new stochastic process as a potential model of the behaviour of asset prices and test it on intra daily deutsche mark futures prices according to this process asset prices are constant between economically relevant events which occur at the random times generated by a poisson process at the moments of these events prices jump to new values the size of the jump is drawn from a normal distribution tests of this process indicate that it cannot be rejected for most of the days in the sample

short sales in log robust portfolio management abstract this paper extends the log robust portfolio management approach to the case with short sales i e the case where the manager can sell shares he does not yet own we model the continuously compounded rates of return which have been established in the literature as the true drivers of uncertainty as uncertain parameters belonging to polyhedral uncertainty sets and maximize the worst case portfolio wealth over that set in a one period setting the degree of the manager s aversion to ambiguity is incorporated through a single intuitive parameter which determines the size of the uncertainty set the presence of short selling requires the development of problem specific techniques because the optimization problem is not convex in the case where assets are independent we show that the robust optimization problem can be solved exactly as a series of linear programming problems as a result the approach remains tractable for large numbers of assets we also provide insights into the structure of the optimal solution in the case of correlated assets we develop and test a heuristic where correlation is maintained only between assets invested in in computational experiments the proposed approach exhibits superior performance to that of the traditional robust approach

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

the road less traveled strategy distinctiveness and hedge fund performance we investigate whether skilled hedge fund managers are more likely to pursue unique investment strategies that result in superior performance we propose a measure of the distinctiveness of a fund s investment strategy based on historical fund return data we call the measure the strategy distinctiveness index sdi we document substantial cross sectional variations as well as strong persistence in sdi our main result indicates that on average a higher sdi is associated with better subsequent performance after adjusting for risk funds in the highest sdi quintile outperform funds in the lowest quintile by 3 5 in the subsequent year the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

dynamic link between oil prices and exchange rates a non linear approach abstract we explore the non linear relationship between crude oil prices and exchange rates of major currencies from quantitative and structural perspectives by utilizing bivariate normal mixture model the correlation coefficients between oil prices and exchange rates demonstrate that their dependences typically start from 2004 then dynamically change over time then we investigate whether business cycle and oil price shocks as two possible exogenous factors affect the dependence structure of oil fx linkage we find significant structural heterogeneity during economic expansion while little evidence of heterogeneity in recession this finding provides alternative interpretations for the enhanced dependence between oil prices and exchange rates and generates implications of financialization in commodity market in terms of oil price shocks kilian 2009 the normal mixture model captures significant heterogeneity implying that unstable oil fx dependence structure is frequently associated with oil aggregate demand shocks and oil specific demand shocks with an emphasis on the dynamic weights of two underlying states we interestingly find that structural heterogeneities coincide with a variety of geopolitical and economic events the application of normal mixture not only provide us knowledge of non linear relationship between oil prices and exchange rates but also guidance for investors in risk management and portfolio diversification complementary to the traditional portfolio theory based on normal distribution

student t distribution based var mgarch an application of the dcc model on international portfolio risk management significant second moment transmission effects and obvious time varying patterns of correlation coefficients among major equity and currency markets in the us japan and the uk are found to exist such observations inspire the time varying setting of dynamic conditional correlation coefficients in mgarch models on the other hand the multivariate student t distribution is suitable for analysing the visible leptokurtosis that is common in financial markets both are important for international portfolio risk management thus a comparison on the hedging efficiency of hypothetical portfolios consisting of stock and currency future positions is conducted in order to justify the multivariate student t distribution based on the dcc mgarch model

anatomy of initial public offerings of common stock initial public offerings of common stocks ipos are typically underpriced in this paper the author develops and tests the hypothesis that underpricing serves as a form of insurance against legal liability and the associated damages to the reputations of investment bankers the empirical results based on samples of ipos that were brought to the market before and after the securities act of 1933 provide considerable support for the implicit insurance hypothesis specifically gross underpricing and market segmentation between prestigious and fringe investment bankers in originating unseasoned new issues appear to be peculiar to the post 1933 era a number of studies have documented that unseasoned common stocks typically garner large positive abnormal returns during a short period following the initial offering in his recent review of the empirical evidence on the initial returns of common stock offerings smith 36 concluded that the returns from offer price to after market price have exceeded fifteen percent his calculations did not include some of the earlier results obtained by mcdonald and fisher 23 and logue 20 when their samples are combined with those in smith s review the initial returns of unseasoned equity offerings appear even larger over seventeen percent these results imply that underwriters consistently offer the securities at substantial discounts from their values that are set in the after market in other words initial public offerings ipos appear to be underpriced what is even more puzzling is the fact that in some time periods underpricing appears to be systematically larger than in other periods ibbotson and jaffe 15 and ritter 29 have documented that during the postwar era there have been a number of periods in which the initial returns of common stocks have been extremely high ritter for example reported that the average return from the offer price to the first after market price was over forty eight percent for ipos in 1980 and 1981 1 similarly the initial returns of unseasoned issues of common stock brought to the market in 1950 1951 1961 and 1968 were unusually large these periods in which ipos were grossly underpriced are referred to as the hotissue markets why do investment bankers underprice ipos why do issuers

the distribution of stock returns new evidence against the stable model we present a simple but effective procedure for determining whether a reasonably large sample comes from a stable population against the alternative that it comes from a population with finite higher moments the procedure uses the fact that a stable population sample has moments of the fourth and sixth order whose magnitudes increase very rapidly as the sample size increases this procedure shows convincingly that stock returns when taken as a group do not come from stable populations even for individual stocks our results show that the stable population model null hypothesis can be rejected for more than 95 of the stocks

on jump processes in the foreign exchange and stock markets exchange rates exhibit systematic discontinuities even after allowingfor conditional heteroskedasticity in the diffusion process the results are much more significant in theforeign exchange market than in the stock market which suggests differences in the structure of these markets finally this jump component is shown to explain some of the empirically observed mispricings in the currency options market the objective of this article is to analyze and compare the empirical distribution of returns in the stock market and in the foreign exchange market there are a number of reasons why a better understanding of the stochastic processes driving prices in these markets would be useful many financial models rely heavily on the assumption of a particular stochastic process while relatively little attention is paid to the empirical fit of the postulated distribution as a result models like option pricing models are applied indiscriminately to various markets such as the stock market and the foreign exchange market when the underlying processes may be fundamentally different the foreign exchange market for instance is characterized by active exchange rate man

properties of realized variance under alternative sampling schemes this article investigates the statistical properties of the realized variance estimator in the presence of market microstructure noise different from the existing literature the analysis relies on a pure jump process for high frequency security prices and explicitly distinguishes among alternative sampling schemes including calendar time sampling business time sampling and transaction time sampling the main finding in this article is that transaction time sampling is generally superior to the common practice of calendar time sampling in that it leads to a lower mean squared error mse of the realized variance the benefits of sampling in transaction time are particularly pronounced when the trade intensity pattern is volatile based on ibm transaction data over the period 2000 2004 the empirical analysis finds an average optimal sampling frequency of about 3 minutes with a steady downward trend and significant day to day variation related to market liquidity and a consistent reduction in mse of th

option pricing under a normal mixture distribution derived from the markov tree model abstract we examine a markov tree mt model for option pricing in which the dynamics of the underlying asset are modeled by a non iid process we show that the discrete probability mass function of log returns generated by the tree is closely approximated by a continuous mixture of two normal distributions using this normal mixture distribution and risk neutral pricing we derive a closed form expression for european call option prices we also suggest a regression tree based method for estimating three volatility parameters and required to apply the mt model we apply the mt model to price call options on 89 non dividend paying stocks from the s p 500 index for each stock symbol on a given day we use the same parameters to price options across all strikes and expires comparing against the black scholes model we find that the mt model s prices are closer to market prices

do hedge funds deliver alpha a bayesian and bootstrap analysis abstract using a robust bootstrap procedure we find that top hedge fund performance cannot be explained by luck and hedge fund performance persists at annual horizons moreover we show that bayesian measures which help overcome the short sample problem inherent in hedge fund returns lead to superior performance predictability sorting on bayesian alphas relative to ols alphas yields a 5 5 per year increase in the alpha of the spread between the top and bottom hedge fund deciles our results are robust and relevant to investors as they are neither confined to small funds nor driven by incubation bias backfill bias or serial correlation

the substitutability of foreign born labour in canadian production circa 1980 the impact of immigrant workers on the employment of canadian born workers is analyzed in 125 canadian industries a translog production function is estimated using data for the year 1980 the estimated cross elasticities suggest no economywide displacement of canadian born workers by immigrants however displacement did occur in a portion of the canadian economy results are compared with a similar u s study

salary patterns of agricultural economists in the early 1980s systematic explanation of wages in the service sector typically has been hampered by the absence of information on physical productivity of service workers frequently the analyst must rely on input information and make strong assumptions about the transformation of inputs and cost into outputs to model the long run pattern of wages in the service sector it may be sufficient to look primarily at relative wages and long term demand factors such as income and population a number of professions in the service sector have been successfully modeled using the familiar cobweb formulation for example hansen et al report the results of estimating a multiequation model of the long run supply and demand for economists generally and conclude among other things that the real salary of new ph d s will fall throughout this decade short run analysis of academic wages usually focuses on various sorts of earnings functions in which the natural log of earnings is regressed against a variety of human capital variables there is an extensive literature on the determinants of general economists salaries and on the determinants of salaries for agricultural economists on salary determinants see for example boddy hansen weisbrod and strauss strauss tolles and melichar and tuckman gapinski and hagemann among others which have examined various aspects of the general market for economists for agricultural economists salaries see for example broder and ziemer 1980 1982 fuller helmberger lane lee lundeen and clausen melichar peck and babb schotzko schrimper ziemer broder and spurlock and redman the more recent literature has emphasized the importance of using actual productivity measures such as publications in explaining variations in earnings along with human capital variables a deficiency in some of this second type of research involves the absence of a welldefined theoretical justification for particular statistical specifications and the reliance on single equation models the objective of this study is to take advantage of a new relatively underutilized data source on agricultural economists in order to examine the general characteristics of agricultural economists and to examine the determinants of their salaries in the early 1980s in particular we examine the 1981 registry of agricultural economists maintained by the american agricultural economics association and the illinois department of labor the registry when examined in conjunction with melichar and unpublished 1976 tabulations of the association s membership list indicate that it is broadly representative of the profession the plan of the paper is as follows the next section describes the data base and provides some general characteristics of agricultural economists in the early 1980s then we examine salary patterns of agricultural economists in various types of employment and focus in more detail on the salaries of academicians especially those who are from and at educational institutions with doctoral programs which have been ranked in terms of the quality of their faculty and in terms of the quality of their graduate programs special attention is paid to the salaries of female agricultural economists and differences in salaries attributable to the race ethnicity of agricultural economists we conclude with a prospectus on outstanding research issues robert p strauss is a professor of economics and public policy school of urban and public affairs carnegie mellon university michael j tarr is a student at cornell university the authors wish to express their gratitude to the aaea and dr emanuel melichar for making unpublished data available for this study and to farm foundation for financial support responsibility for the views and any errors in this paper rests solely with the authors

insider trading abnormal return and preferential information supervising through a probabilistic model abstract the enforcement of the ban on insider trading requires an evaluation of the disgorgement i e the capital gain of the insider trader who takes advantage of the exploitation of preferential information an initial step forward on this topic has been taken by the sec the united states securities and exchange commission which has developed a quantitative procedure based on the event study methodology this paper develops an adaptation of this procedure for the italian market and explains the limits of these methodologies in the analysis of the insider trading phenomenon in particular it emerges that the econometric approach cannot be applied to all insider trading schemes in fact in order to work out statistically significant results it relies on a series of assumptions such as the existence of a robust reference market index or the availability of long time series data for this reason a new procedure for computing the economic value of the information exploited by the insider based on a probabilistic approach has also been developed this methodology overcomes the issues connected to the event study procedure and can be applied by construction to all insider trading schemes and not only to the simplest ones in fact the model parameters are defined by using the trading strategy of the single insider thus if insider trading takes place the model is able to offer a disgorgement computation hence by hypotheses of its construction it is able to detect the difference between insiders and followers the new procedure has been adopted by consob and has been presented to the judicial system which is in charge of inflicting the fine

performance characteristics of hedge funds and commodity funds natural vs spurious biases it is well known that the pro forma performance of a sample of investment funds contains biases these biases are documented in brown goetzmann ibbotson and ross 1992 using mutual funds as subjects the organization structure of hedge funds as private and often offshore vehicles makes data collection a much more onerous task amplifying the impact of performance measurement biases theis paper reviews these biases in hedge funds we also propose using funds of hedge funds to measure aggregate hedge fund performance based on the idea that the investment experience of hedge fund investors can be used to estimate the performance of hedge funds

predictable events and excess returns the case of dividend announcements abstract this paper hypothesizes that the risk per unit of time and the required rate of return are higher than normal during an event period whose timing can be predicted consistent with this hypothesis this paper presents empirical evidence indicating that the unconditional mean rate of return the variance of stock returns and their systematic risk are higher than usual during dividend announcement periods however the documented increases in the systematic risk are not large enough to fully explain the excess returns this finding is puzzling and hard to reconcile with existing theory

underwriter price support and the ipo underpricing puzzle abstract this paper reassesses the apparent systematic underpricing of initial public offerings ipos investigation of the distribution of initial returns following ipos shows that positive mean initial returns may reflect the existence of a partially unobserved left negative tail moreover most ipos with zero one day returns subsequently fall in price suggesting that underwriter price support may account for the skewed distribution and hence the phenomenon of positive average initial ipo returns even if offering prices are set at expected market value this paper thus challenges the presumption underlying previous research that positive average initial ipo returns result primarily from deliberate underpricing

evidence on price stabilization and underpricing in early ipo returns using data on 560 firm commitment initial public offerings of common stock for the 1982 1983 period we find that the cross sectional distribution of one day returns is modeled better as a mixture of two distributions with the parameter estimates of one distribution being consistent with underpricing and the other with price stabilization further the evidence that early ipo returns are drawn from a mixture distribution persists for at least four weeks the implications of these results for the analysis of ipo returns are illustrated by examining the influence of a measure of ex ante price uncertainty on ipo pricing

the effects of estimation error on measures of portfolio credit risk abstract this paper uses monte carlo simulations to assess the impact of noisy input parameters on the accuracy of estimated portfolio credit risk assumptions about input quality are derived from the distribution of historical sample statistics commonly used in default risk modelling the resulting estimation error in the distribution of portfolio losses is considerable losses that are judged to occur with a probability of 0 3 may actually occur with a probability of 1 the paper also shows that estimation error leads to biases in value at risk estimates and significance levels of backtests the biases can be corrected by analysing predictive distributions which average over the unknown parameter values

the probability distribution of foreign exchange price changes tests of candidate processes this study investigates empirically candidate processes for characterizing foreign exchange price changes measured over limited horizons extant empirical studies find distributions of exchange returns too long tailed and leptokurtic to satisfy normality four processes are investigated here because of their potential to model o bserved discontinuities in exchange rates and nonstationary sample moments as well as their economic appeal the results favor a mixed jump model for all six major trading currencies tested copyright 1988 by mit press

the immigration of third world professionals to canada 1968 1973 abstract in this paper we estimate a reduced form equation for highly skilled immigration to canada during the period 1968 1973 the purported open immigration policy during this period implied that a relatively unregulated flow of immigrants came to canada we found to the contrary that the third world immigrant flow was carefully regulated and responded significantly to four principal variables the number of job vacancies by occupation competing opportunities in the united states the total flow of third world immigrants and the number of movers from the country under consideration the income variable never proved significant

an application of the chi squared goodness of fit test to discrete common stock returns this article presents the centered method for establishing cell boundaries in the x 2 goodness of fit test which when applied to common stock returns significantly reduces the high bias of the test statistic associated with the traditional mann wald equiprobable approach a modified null hypothesis is proposed to incorporate explicitly the usually implicit assumption that the observed discrete returns are approximated by the hypothesized continuous density simulation results indicate extremely biased x 2 values resulting from the traditional approach particularly for low priced and low volatile stocks daily stock returns for 114 firms are tested to determine whether they are approximated by a normal or one of several normal mixture densities results indicate a significantly higher degree of fit than that reported elsewhere to date

option values under stochastic volatility theory and empirical estimates abstract this paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility statistical estimators for volatility process parameters are derived and parameter estimates are calculated for several individual stocks and indices the resulting estimated option values do not differ dramatically from black scholes values in most cases although there is some evidence that for longer maturity index options black scholes overvalues out of the money calls in relation to in the money calls

a general distribution for describing security price returns this paper introduces a generalized distribution called the gb2 distribution for describing security returns the distribution is extremely flexible containing a large number of well known distributions such as the lognormal log t and log cauchy distribu tions as special or limiting cases and allowing large even infinite higher moments this flexibility allows a direct representation of different degrees of fat tails in the distribution the properties of the gb2 make it useful in empirical estimation of security returns and in facilitating the development of option pricing models and other models that depend on the specification and mathematical manipulation of distributions copyright 1987 by the university of chicago

evidence on barriers to the parallel advancement of male and female agricultural economists barriers to parallel advancement of male and female economists and managers but not agricultural economists have been studied in some detail reagan strober epstein gordon and strober reagan wrote on the supply side barriers to full career development for women are likely to be those common to all professional occupations plus the effect of women s perceptions of the intensity of the demand side barriers of the particular profession i e any lack of support of male colleagues professional isolation and lack of access to information network or employers lack of perception of the women s career potential one group of supply side barriers in

demand and supply factors of black agricultural economists a review of the economics and agricultural economics literature over the past twenty years reveals that considerable attention has been given to the demand supply and market for economists and agricultural economists boddy 1962 1973 harmon clague and levine helmberger and strauss and tarr however much of the work until fairly recently has focused on the demand supply and market for all economists and agricultural economics with very little attention given to how sex and or race may differentiate the produce that is the majority of these studies tend to treat economists and agricultural economists as homogenous products and the market as perfectly competitive recent studies on the role and status of women in the two

a reexamination of finite and infinite variance distributions as models of daily stock returns this study investigates the general asymmetric stable paretian distribution and three finite variance time independent distributions applied to daily stock return series previous empirical comparisons have in general ignored the existence and effects of skewness on the process parameters of stable laws the results of log likelihood ratio and log odds tests indicate that finite variance models still dominate after accounting for documented skewness in particular the mixed diffusion jump and compound normal models appear to be the most descriptive time independent models