order flow transaction clock and normality of asset returns the goal of this paper is to show that normality of asset returns can be recovered through a stochastic time change clark 1973 addressed this issue by representing the price process as a subordinated process with volume as the lognormally distributed subordinator we extend clark s results and find the following i stochastic time changes are mathematically much less constraining than subordinators ii the cumulative number of trades is a better stochastic clock than the volume for generating virtually perfect normality in returns iii this clock can be modeled nonparametrically allowing both the time change and price processes to take the form of jump diffusions the relations among trading volume stock prices and price volatility the subject of empirical and theoretical studies over many years have lately received renewed attention with the increased availability of high frequency data a vast amount of research has focused on issues such as news arrivals volume and price changes or volatility moves usually outside any framework of general or even partial equilibrium is the normality of returns a key issue for example in the mean variance paradigm for portfolio choice or the recent study of the problems of risk management e g in value at risk verified at any time horizon the evidence accumulated from a number of studies that document the presence of leptokurtosis and skewness in the distribution of returns of a wide variety of financial assets suggests that the answer is no studies as early as for example fama 1965 showed that daily returns are more long tailed than the normal density with the distribution of returns approaching normality as the holding period is extended to one month in the same manner volatility smiles and other observed

determinants of bilateral trade protection in this paper determinants of bilateral protection levels are empirically identified when controlling for multilateral trade regulation and importing country specific factors strong empirical support is provided of that three bilateral factors are influencing the bilateral protection level specifically a country s protection level on goods from a trade partner is positively affected by the domestic import penetration of goods produced by the trade partner negatively influenced by the intra industry traded share of these imports and positively affected by the trade partner s protection level on domestic goods moreover very high explanatory values are provided in the cross section estimations indicating that these determinants policy regulations and importer specific factors jointly explain almost all of the variation in bilateral protection levels the results are general in the sense that estimations are performed for a large sample of bilateral trade relations including 22 trade partners that are highly differentiated in terms of country characteristics the overall results indicate that to the extent that policy makers can affect bilateral protection levels under multilateral trade regulation they act on political economy rather than economic goals

heterogeneous information arrivals and return volatility dynamics uncovering the long run in high frequency returns recent empirical evidence suggests that the interdaily volatility clustering for most speculative returns are best characterized by a slowly mean reverting fractionally integrated process meanwhile much shorter lived volatility dynamics are typically observed with high frequency intradaily returns the present article demonstrates that by interpreting the volatility as a mixture of numerous heterogeneous short run information arrivals the observed volatility process may exhibit long run dependence as such the long memory characteristics constitute an intrinsic feature of the return generating process rather than the manifestation of occasional structural shifts these ideas are confirmed by our analysis of a one year time series of fiveminute deutschemark u s dollar exchange rates among the most puzzling issues is the behavior of volatility while the general properties of volatility remain elusive perhaps the most intriguing feature revealed by empirical work on volatility is its long persistence such behavior has sparked a search almost akin to that for the holy grail for the perfect garch model but the underlying question of why such volatility persistence endures remains unanswered we conjecture that the ability to analyze higher frequency data may be particularly useful in pursuing this issue goodhart and o hara 1997 the pronounced volatility clustering is arguably one of the most striking features of financial price series recorded at daily or weekly intervals and a large body of literature seeking to characterize this aspect of speculative returns has emerged over the past decade 1 at the same time convincing theoretical explanations for the underlying sources of long run persistence in volatility remain elusive the recent advent of comprehensive high frequency andersen is from the j l kellogg graduate school of management of northwestern university bollerslev is from the university of virginia and is a research associate at the national bureau of economic research we gratefully acknowledge the financial support provided by a research grant from the institute for quantitative research in finance the q group special thanks are due to olsen and associates for making the intradaily exchange rate quotes and reuter s news tape available we have received valuable comments from wake epps clive w j granger stephen f gray j huston mcculloch as well as seminar participants at the december 1996 triangle econometrics workshop the 1997 afa meetings in new orleans academia sinica the wharton school usc and georgetown and york universities we remain fully responsible for the content 1 see bollerslev chou and kroner 1992 for a survey of this literature using arch type

market specific news and its impact on forward premia on electricity markets abstract this paper studies the impact of market specific news on the short term forward premia on the nordic electricity market i show that the short term premia between the day ahead and intra day electricity prices on the nordic market can be partly explained by the arrival of news specific to the power market by exploring the types of news i show that production failures are most important in shaping premia production disruptions in coal powered units are most frequent and have the greatest effect on the differences between the day ahead and intra day prices

jumps cojumps and macro announcements we use recently proposed tests to extract jumps and cojumps from three types of assets stock index futures bond futures and exchange rates we then characterize the dynamics of these discontinuities and informally relate them to us macroeconomic releases before using limited dependent variable models to formally model how news surprises explain co jumps nonfarm payroll and federal funds target announcements are the most important news across asset classes trade balance shocks are important for foreign exchange jumps we relate the size frequency and timing of jumps across asset classes to the likely sources of shocks and the relation of asset prices to fundamentals in the respective classes

authorized generic entry prior to patent expiry reassessing incentives for independent generic entry abstract originators seek to mitigate the loss of monopoly power by authorizing generic entry prior to patent expiry off patent competition may be adversely affected if authorized generic entry substantially lowers the attractiveness of subsequent generic entry this study assesses the impact of authorized generic entry on independent generic entry in recent cases of patent expiry in germany the results of a recursive bivariate probit regression accounting for the endogeneity of authorized generic entry show that authorized generic entry has no significant effect on the likelihood of generic entry business scope expansion and rent seeking motives drive authorized generic entry decisions

nonlinear term structure dependence copula functions empirics and risk implications abstract this paper documents nonlinear cross sectional dependence in the term structure of us treasury yields and points out risk management implications the analysis is based on a kalman filter estimation of a two factor affine model which specifies the yield curve dynamics we then apply a broad class of copula functions for modeling dependence in factors spanning the yield curve our sample of monthly yields in the 1982 2001 period provides evidence of upper tail dependence in yield innovations i e large positive interest rate shocks tend to occur under increased dependence in contrast the best fitting copula model coincides with zero lower tail dependence this asymmetry has substantial risk management implications we give an example in estimating bond portfolio loss quantiles and report the biases which result from an application of the normal dependence model

duration models and irr management a question of dimensions abstract this paper compares the immunization performance of alternative single and multiple factor duration models using spanish government bond data over 1 2 and 3 year horizons the aim is to assess whether the success of duration matching strategies is primarily attributable to the particular model chosen or to the number of risk factors considered empirical tests show that i traditional immunization is easily bettered by more realistic strategies ii the number of risk factors considered has a greater influence on the result than the particular model chosen and iii three factor immunization strategies offer the highest immunization benchmarks

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

information technology and time based competition in financial markets this paper studies time based competition in imperfect securities markets linking it investment decisions information processing delays and trading strategies at the it investment stage traders trade off the cost of it against their anticipated trading profits at the trading stage each trader devises a trading strategy based on his new information while taking into account the impact of both his own trades and those of other traders in the market our results illustrate how traders react to market imperfections due to trading costs and information processing delays and how superior traders convert a timeliness advantage into higher trading profits they also shed light on the relationship between the price adjustment process and traders information processing delays timeliness imposes an interesting structure on trader competition traders with longer information processing delays trade less frequently submit smaller orders and enjoy lower profits per trade our analysis of traders it investment decisions demonstrates how factors such as it costs number of traders and the frequency and nature of new information affect the level of it investments we further illustrate how improved it infrastructure translates into competitive advantage

the impact of fomc statements on the volatility of asset prices this article examines the impact of federal open market committee fomc statements on asset prices statements are found to have a much more pronounced impact on the volatility of asset prices than interest rate surprises they influence primarily stock returns intermediate and long term yields whereas short term rates are driven both by statements and by interest rate surprises we also find that the regime shift of may 1999 has improved the effectiveness of monetary policy as reflected in an overall reduction in market volatility during the most recent regime in addition markets are equally well prepared for the upcoming rate decision in both regimes but the process of adjustment depends on whether a statement was issued in the old regime or not when a statement is issued price adjustments are very similar across both periods whereas if no statement is issued then the rate of adjustment towards the new value is more gradual and occurs throughout the entire intermeeting period

china s official rates and bond yields abstract recent research shows that bond yields are influenced by monetary policy decisions to learn how this works in a bond market that differs significantly from those in the us and europe we model chinese bond yields using the one year deposit interest rate as a state variable we also include the spread between the one year market interest rate and the one year deposit interest rate as another factor the model is developed in an affine framework and closed form solutions are obtained we then test the model empirically with a markov chain monte carlo simulation procedure the results show that the new model that incorporates the official rate in china characterizes the changing shape of the yield curve well

price formation and liquidity in the u s treasury market the response to public information the arrival of public information in the u s treasury market sets off a two stage adjustment process for prices trading volume and bid ask spreads in a brief first stage the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume demonstrating that price reactions to public information do not require trading the spread widens dramatically at announcement evidently driven by inventory control concerns in a prolonged second stage trading volume surges price volatility persists and spreads remain moderately wide as investors trade to reconcile residual differences in their private views how do financial markets form prices and provide liquidity when information arrives efforts to address this issue have led to an extensive microstructure literature on equity markets and to a lesser extent on the foreign exchange fx market relatively little work has focused on the u s treasury market however in spite of its importance in its own right and the advantages it offers as an alternative testing ground for microstructure hypotheses

macroannouncements bond auctions and rating actions in the european government bond spreads this paper investigates the impact of macroannouncements government bond auctions and rating actions on the 10 year government bond spreads for belgium france italy the netherlands spain with respect to germany using a unique tick by tick dataset over 1 02 2009 05 31 2012 we identify the impact of the three drivers via jump and cojump detection procedures disentangling the pre from the post announcement effects real economy and forward looking news releases from us and euro area country specific spanish and german macroannouncements and auctions hold in distressed countries such italy and spain have a statistically and economically significant effect no role is played by rating actions

price discovery in the u s treasury market the impact of orderflow and liquidity on the yield curve we examine the role of price discovery in the u s treasury market through the empirical relationship between orderflow liquidity and the yield curve we find that orderflow imbalances excess buying or selling pressure can account for as much as 26 percent of the day to day variation in yields on days without major macroeconomic announcements the effect of orderflow on yields is permanent and strongest when liquidity is low all of the evidence points toward an important role of price discovery in understanding the behavior of the yield curve

information asymmetries and security market design an empirical study of the secondary market for u s government securities this paper examines the empirical implications of an information asymmetry between primary and secondary dealers in the u s government securities market this asymmetry arises because primary dealers are permitted to trade through all brokers operating in the marketplace while secondary dealers are restricted to trade through only a subset of brokers brokers distribute valuable information over video screens to their trading clients including dealers up to date bid ask spreads and recent transaction prices as such all brokers video screen information is available to primary dealers while only a subset of brokers information is available to secondary dealers empirical analyses detect the resulting information asymmetry

the effect of unanticipated money on the money and foreign exchange markets abstract a number of studies have attempted to determine why unanticipated increases in the money supply are positively correlated with money market interest rates by examining the response of the foreign exchange market to unanticipated changes in the money stock they have found a significant positive relationship between unanticipated increases in the money supply and the foreign exchange value of the dollar and have interpreted this as evidence for the anticipated liquidity effect hypothesis however these results support this hypothesis only if both markets respond simultaneously to unanticipated changes in money this paper examines the cross market consistency of the response using six bilateral exchange rates and the treasury bill rate all measured over a narrow time interval the results show that in general these markets do not respond simultaneously to money announcements

the effects of macroeconomic news on high frequency exchange rate behavior this paper studies the high frequency reaction of the dem usd exchange rate to publicly announced macroeconomic information emanating from germany and the u s by us ing data sampled at a five minute frequency we are able to identify significant impacts of most announcements on the exchange rate change in the 15 minutes post announcement although the significance of these effects decreases rapidly as the interval over which the post announcement change in exchange rates is increased the direction of the exchange rate response conforms in general with a reaction function interpretation whereby reac tions to macroeconomic news are driven by the likely operations of monetary authorities in domestic money markets further we detect influences of german monetary policy deci sions on the reaction of the exchange rate and also differences between u s and german announcements in the exchange rate reaction time pattern i introduction this paper studies the high frequency reaction of the dem usd exchange rate to macroeconomic information emanating from germany and the u s specif ically we utilize exchange rate data covering the period 1 1 92 to 31 12 94 sam pled at a five minute frequency to investigate how the major monthly macroe conomic releases from these two countries impact the dem usd the infor mation contained in announcements over this three year period is extracted via a set of market expectation series supplied by money market services interna tional mms 1 our analysis improves on previous work in this area in two main respects first our study is conducted using very high frequency data whereas most earlier work has used exchange rate data sampled at a frequency of a number of hours or more this allows us to construct a very precise characterization of

competitive inventory management in treasury markets abstract we decompose us treasury bid ask spreads into inventory adverse selection and order processing costs by using the fact that inventory trades have different effects on spreads than do proprietary trades we exploit this asymmetry and develop a technique to identify the three components of the spread in order to test three hypotheses dealers make larger changes to inventory 1 following macroeconomic announcements 2 at the start and toward the end of the new york trading hours and 3 when transaction sizes are relatively large we test these predictions using govpx data for on the run 2 year and 10 year treasury notes all three predictions are supported we also assess how primary dealers react to the federal reserve s open market operations omos our findings reveal interesting intraday patterns in the inventory component for both securities

dependence structure between nominal and index linked bond returns a bivariate copula and dcc garch approach this article investigates the dependence structure related to four french nominal and index linked bonds with various maturities and reference indices to achieve this aim we estimate various copulas to select the appropriate one for our data we also compare results obtained using the copula method with multivariate dynamic conditional correlation garch dcc garch modelling the major issue in this study is that the best copulas used to model the dependence among bond returns are the plackett and student models we also find a dynamic correlation between bond returns in particular the relationship between nominal and indexed bonds is characterized by an asymmetric dependence moreover the results obtained by the copula approach are confirmed by those obtained by multivariate garch modelling our empirical study provides a useful method that may be employed by decision makers to quantitatively introduce dependence and spillover effects in their bond issuance policy for investors we propose optimal

mode of entry mode into a foreign market the case of u s mutual funds in canada abstract u s mutual fund companies offer funds in canada through two channels foreign direct investment or trade in advisement services the total value of u s controlled funds amounts to 18 of the canadian equity fund market this paper investigates how the fund level and firm level characteristics affect the channel used to enter the canadian market empirical results indicate that the funds offered through fdi are not especially successful in the u s market but are associated with dominant companies whereas the funds offered through trade in advisement services are highly successful in the u s market and are from companies with relatively few successful funds

contract and exit decisions in finisher hog production finisher hog production in north america has shifted toward larger units and contract format since 1990 exit among independent growers has been high we develop a model showing that growers with any of three efficiency attributes lower innate hazard of exit variable costs or contract adoption costs are more likely to contract produce more and expend more on business protection using 2004 agricultural resource management survey data a recursive bivariate probit model confirms that contracting producers are less likely to exit specialization increases the probability of contracting education nonfarm income and older production facilities are significant in increasing expected exit

volatility in wheat spot and futures markets 1950 1993 government farm programs seasonality and causality we explore how wheat spot and futures market volatility has been impacted by government farm programs during the 1950 1993 period we find that changing volatility in both markets is highly associated with changing farm programs the mandatory allotment programs of the 1950s and early 1960s 1 3 50 4 10 64 were associated with low volatility while the voluntary programs initiated in the mid 1960s seem to have induced high volatility 4 11 64 12 22 85 both market driven loan rates and conservation reserve programs appear to have helped volatility revert to lower levels since the mid 1980s 12 23 85 12 30 93 we also examine seasonality and causality in conjunction with the farm programs we explore how wheat spot and futures price volatility has been impacted by government farm programs many studies have examined the effects of various farm policies mckinnon 1967 blakeslee 1980 miranda and helmberger

intraday price reversals for index futures in the us and hong kong abstract we observe intraday price reversals following large price changes at the opening of the s p 500 futures market and the hsi futures market we note that the magnitude of subsequent price reversals is positively related to the initial price changes and that the price reversals are not caused by a bid ask spread or by panic among investors we also note that such price reversals can be exploited to give rise to profitable opportunities after transaction costs even though these may not be very significant this study shows that investor overreaction may be a universal phenomenon and irrational investor behavior like overreaction may also exist among groups of sophisticated investors

the determinants of asymmetric volatility volatility in equity markets is asymmetric contemporaneous return and conditional return volatility are negatively correlated in this article i develop an asymmetric volatility model where dividend growth and dividend volatility are the two state variables of the economy the model allows both the leverage effect and the volatility feedback effect the two popular explanations of asymmetry the model is estimated by the simulated method of moments i find that both the leverage effect and volatility feedback are important determinants of asymmetric volatility and volatility feedback is significant both statistically and economically the relationship between stock price and its volatility has long interested financial researchers empirically returns and conditional variance of next period s returns are negatively correlated that is negative positive returns are generally associated with upward downward revisions of the conditional volatility this empirical phenomenon is often referred to as asymmetric volatility in the literature see engle and ng 1993 zakoian 1994 and wu and xiao 1999 the presence of asymmetric volatility is most apparent during stock market crashes when a large decline in stock price is associated with a significant increase in market volatility formal econometric models have been developed by researchers to capture asymmetric volatility for example asymmetric arch models of nelson 1991 and glosten jagannathan and runkle 1993 have been found to significantly outperform their counterparts that do not accommodate the asymmetry moreover continuous time stochastic volatility models generally produce estimates of a negative correlation between return and return volatility bakshi cao and chen 1997 and bates 1997 for a review of the literature on asymmetric volatility see bekaert

optimal pricing strategies for a cluster of goods own and cross price effects with correlated tastes contingent valuation methods are used to identify observed and unobserved preferences of goods and services we apply these methods in the context of multivariate probit analysis to compute willi

volatility spillovers and the effect of news announcements we examine the effect of us and european news announcements on the spillover of volatility across us and european stock markets using synchronously observed international implied volatility indices at a daily frequency we find significant spillovers of implied volatility between us and european markets as well as within european markets we observe a stark contrast in the effect of scheduled versus unscheduled news releases scheduled unscheduled news releases resolve create information uncertainty leading to a decrease increase in implied volatility nevertheless news announcements do not fully explain the volatility spillovers although they do affect the magnitude of volatility spillovers our results are robust to extreme market events such as the recent financial crisis and provide evidence of volatility contagion across markets

the short run dynamics of the price adjustment to new information we examine how prices in interest rate and foreign exchange futures markets adjust to the new information contained in scheduled macroeconomic news releases in the very short run using 10 second returns and tick by tick data we find that prices adjust in a series of numerous small but rapid price changes that begin within 10 seconds of the news release and are basically completed within 40 seconds of the release there is some evidence that prices overreact in the first 40 seconds but that this is corrected in the second or third minute after the release while volatility tends to be higher than normal just before the news release there is no evidence of information leakage in our analysis we correct for the biases created by bid ask spreads and tick by tick data

segmentation and time of day patterns in foreign exchange markets abstract this paper sheds light on a puzzling pattern in spot foreign exchange markets domestic currencies appreciate depreciate systematically during foreign domestic working hours this phenomenon spans many years and several exchange rates and overrides calendar effects we argue that it is mainly due to liquidity and inventory patterns that emerge from the combination of two factors domestic agents tend to be net buyers of foreign currency and to trade mostly in their country s working hours the prevalence of domestic foreign traders demanding the counterpart currency during domestic foreign working hours implies sell price buy price pressure on the domestic currency during domestic foreign working hours

intraday market effects in electronic soybean futures market during non trading and trading hour announcements abstractthis article investigates market reactions to major united states department of agriculture announcements during non trading and trading hours in the soybean futures market using microstruc

how markets process information news releases and volatility we examine the impact of scheduled macroeconomic news announcements on interest rate and foreign exchange futures markets we find these announcements are responsible for most of the observed time of day and day of the week volatility patterns in these markets while the bulk of the price adjustment to a major announcement occurs within the first minute volatility remains substantially higher than normal for roughly fifteen minutes and slightly elevated for several hours nonetheless these subsequent price adjustments are basically independent of the first minute s return we identify those announcements with the greatest impact on these markets we examine the impact on interest rate and foreign exchange markets of scheduled macroeconomic news releases such as the employment report the consumer price index cpi and the producer price index ppi many market participants believe that such announcements have a major impact on financial markets indeed a small industry devoted to predicting the figures to be released in upcoming releases has evolved in recent years with the exception of the weekly money supply figures however the impact of such announcements on financial markets has received scant attention 1 this is doubly surprising given the considerable research interest in market volatility since these news releases are a potential source of much of this volatility consider for instance figure 1 as shown there prices in interest rate and foreign exchange futures markets are much more volatile between 8 30 and 8 35 a m eastern time et than during any other five minute trading period including

market making costs in treasury bills a benchmark for the cost of liquidity abstract we focus on market making costs by examining the daily bid ask spreads for off the run one month treasury bills around two liquidity changing events event one salomon brothers supply shock results in a roughly 2 5 basis point increase in the spread because of an increase in ask prices and event two the long term capital management demand shock results in a doubling of the spread because of a decrease in bid prices our results provide a benchmark for researchers examining bid ask spreads of securities that include a liquidity premium a risk premium and an asymmetric information premium

us presidential elections and implied volatility the role of political uncertainty abstract this paper focuses on the effects of political uncertainty and the political process on implied stock market volatility during us presidential election cycles using monthly iowa electronic markets data over five elections we document that stock market uncertainty as measured by the vix volatility index increases along with positive changes in the probability of success of the eventual winner the association between implied volatility and the election probability of the eventual winner is positive even after controlling for changes in overall election uncertainty these findings indicate that the presidential election process engenders market anxiety as investors form and revise their expectations regarding future macroeconomic policy

how the equity market responds to unanticipated events we examine the market reaction of prices volume spreads and trading location when firms experience events that are totally unanticipated by the equity market in terms of both timing and content we find that the response time is longer than previous studies have reported selling pressure wider spreads and higher volume remain significant for over an hour we also find an immediate price reaction for overnight events however the market takes longer to react to events that occur when it is open these findings may shed light on the efficacy of trading halts

testing the empirical performance of stochastic volatility models of the short term interest rate i introduce two factor discrete time stochastic volatility models of the short term interest rate to compare the relative performance of existing and alternative empiricial specificattions i develop a nonlinear asymmmetric framework that allows for comparisons of non nested models featuring conditional heteoskedasticity and sensitivity of the volatility process to interest rate levels a new class of stochastic volatility models with asymmetric garch models the existing models are rejected in favor of the newly proposed models because of the asymmetric drift of the short rate and the presence of nonlinearity asymmetry garch and level effects in its volatility i test the predictive power of nested and non nested models in capturing the stochastic behavior of the risk free rate empirical evidence on three six and 12 month u s treasury bills indicates but that two factor stochastic volatility models are better than diffusion and garch models in forecasting the future level and volatility of interest rate changes

automation versus intermediation evidence from treasuries going off the run this paper examines the choice of trading venue by dealers in u s treasury securities to determine when services provided by human intermediaries are difficult to replicate in fully automated trading systems when treasury securities go off the run their trading volume drops by more than 90 this decline in trading volume allows us to test whether intermediaries knowledge of the market and its participants can uncover hidden liquidity and facilitate better matching of customer orders in less active markets consistent with this hypothesis the market share of electronic intermediaries falls from 81 to 12 when securities go off the run electronic trading systems have been steadily increasing their share of securities trading in almost all financial markets as the amount of automation in financial markets increases it is natural to ask what services human intermediaries provide that are difficult or impossible to replicate in a fully automated trading system existing theory suggests that human intermediaries play at least two important functions first an intermediary s knowledge of the market and its participants may uncover hidden liquidity that facilitates quicker and more efficient matching of customer orders grossman 1992 the value of this matching function is greater when trading volume is low and matches are difficult to find second when information asymmetry is high the repeated interaction between an intermediary and its customers allows the intermediary to protect itself against informed trades and offer better prices to its customers seppi 1990 these two factors explain for example why electronic communications networks ecns have a greater market share for the largest and most actively traded nasdaq stocks while nasdaq market makers have a larger share in smaller less liquid stocks characterized by greater information asymmetry barclay hendershott and mccormick 2003 and why nyse specialists have higher participation rates in smaller less liquid stocks madhavan and sofianos 1998

announcements and the effectiveness of monetary policy a view from the us prime rate abstract until 1994 the us prime rate was said to be sticky because of its irresponsiveness to short term interest rates after the fed started the practice of announcing its intended funds rate in 1994 however the prime rate has come to react immediately to shifts in the target rate this paper attempts to explain how the fed s policy announcements changed the behavior of the prime rate by using a simple menu cost model it shows that an increase in the expected duration of funds rate targets was essential to the improvement in the target rate pass through

an investigation of transactions data for nyse stocks using transactions data the behavior of returns and characteristics of trades at the micro level is examined a minute by minute market return series is formed and tested for normality and autocorrelation evidence of differences in return distributions is found among overnight trades trades during the first 30 minutes following the market opening trades at the close and trades during the remainder of the day the latter distribution is found to be normal unusually high returns and standard deviations of returns are found at the beginning and the end of the trading day when the beginningand end of the day effects are omitted autocorrelation in the market return series is reduced substantially a number of patterns in trading are reported this paper empirically investigates the nature of the return generating process and the characteristics of trade size price changes trading frequency and trading interval at the level of individual trades for a large sample of nyse stocks previous studies of market indices have used daily weekly or monthly

nonparametric modeling of u s interest rate term structure dynamics and implications on the prices of derivative securities this paper develops a nonparametric model of interest rate term structure dynamics based on a spot rate process that permits only positive interest rates and a market price of interest rate risk that precludes arbitrage opportunities both the spot rate process and the mar ket price of interest rate risk are nonparametrically specified so that the model allows for maximal flexibility in fitting into the data marginal density of interest rates and historical term structure data are exploited to provide robust estimation of the nonparametric term structure model the model is implemented using u s data and the estimation results are compared to those in the available literature empirical results not only provide strong evidence that most traditional spot rate models and market prices of interest rate risk are misspecified but also confirm that the nonparametric model generates significantly differ ent term structures and prices of common derivatives

macroeconomic announcements and asymmetric volatility in bond returns this study analyses the impact of macroeconomic news announcements on the conditional volatility of bond returns using daily returns on the 1 3 5 and 10 year us treasury bonds we find that announcement shocks have a strong impact on the dynamics of bond market volatility our results provide empirical evidence that the bond market incorporates the implications of macroeconomic announcement news faster than other information moreover after distinguishing between types of macroeconomic announcements releases of the employment situation and producer price index are especially influential at the intermediate and long end of the yield curve while monetary policy seem to affect short term bond volatility

food stamp program participation and food insecurity an instrumental variables approach the relationship between food stamp program fsp participation and household food insecurity fi is investigated using data from the 1996 1997 national food stamp program survey endogeneity of fsp participation is accommodated with an instrumental variables approach in contrast to other findings reported in the literature results suggest participation in the fsp reduces the severity of fi sociodemographic variables play important roles in fsp participation and fi underreporting of fsp participation and limited observations of food insecure households in previous studies may have also been factors copyright 2008 oxford university press

time varying international stock market interaction and the identification of volatility signals abstract this paper investigates the dependency of international stock market interaction on financial volatility we show in a stylized economic model that volatility dependent cross market spillovers can be interpreted in two different ways as indicating information flow or uncertainty if higher volatility in one market leads to higher lower reactions in another market volatility reflects information uncertainty we apply a simultaneous time varying coefficient model where structural arch type variances serve two purposes governing the time variation of spillovers and ensuring statistical identification we analyze data of us and further stock markets indeed we find strong nonlinear volatility dependent spillovers

the reaction of exchange rates to economic news this paper examines the short run responses of spot exchange rates to several types of economic news survey data are used to divide economic announcements into expected and unexpected components with the latter measuring news the results indicate that exchange rates are systematically related to unexpected money announcements after the october 1979 switch in federal reserve operating procedures but not before this response does not appear to have changed however after the october 1982 federal reserve regime change short run exchange rate movements are not systematically related to news on inflation or real activity

the effect of macroeconomic news on beliefs and preferences evidence from the options market we examine the effect of regularly scheduled macroeconomic announcements on the beliefs and preferences of participants in the u s treasury market by comparing the option implied state price densities spds of bond prices shortly before and after the announcements we find that the announcements reduce the uncertainty implicit in the second moment of the spd regardless of the content of the news the changes in the higher order moments in contrast depend on whether the news is good or bad for economic prospects we explore three alternative explanations for our empirical findings relative mispricing changes in beliefs and changes in preferences we find that our results are consistent with time varying risk aversion

short rate nonlinearities and regime switches abstract using non parametric estimation methods various authors have shown distinct non linearities in the drift and volatility function of the us short rate which are inconsistent with standard affine term structure models we document how a regime switching model with state dependent transition probabilities between regimes can replicate the patterns found by the non parametric studies to do so we use data from the uk and germany in addition to us data and include term spreads in some of our models we also examine the drift and volatility function of the term spread

market perceptions of federal reserve policy and the weekly monetary announcements abstract in october 1979 the federal reserve altered its operating procedures emphasizing control of the growth rate of the money stock was the fed able to gain credibility in the market the paper investigates this question by examining the reactions of spot and expected future exchange rates foreign interest rates and long run domestic forward interest rates to the weekly federal reserve announcements of m l both before and after october 1979 the empirical evidence points out that the fed did gain credibility but was unable to establish full credibility the market reactions are consistent with the hypothesis that market participants attached a positive probability to the event that the fed may at some point in the future abandon its money stock targets

the gatt and gradualism abstract this paper shows how the institutional rules imposed on its signatories by the gatt created a strategic incentive for countries to liberalize gradually trade liberalization must be gradual and free trade can never be achieved if punishment for deviation from an agreement is limited to a withdrawal of equivalent concessions and if initial deviation from an agreement is also limited the paper shows how sufficiently patient countries have an incentive to deviate in a limited way when operating under gatt dispute settlement procedures

risk inflation and the stock market most explanations for the decline in share values over the past two decades have focused on the concurrent increase in inflation this paper considers an alternative explanation a substantial increase in the riskiness of capital investments we show that the variance of firms real gross marginal return on capital has increased significantly increasing the relative riskiness of investors returns on equity and that this can explain a large part of the market decline we also assess the effects of increase in the mean and variance of the inflation rate and a decline in firms expected return on capital this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

unit tax versus ad valorem tax a tax competition model with cross border shopping abstract within the framework of spatial tax competition with cross border shopping we examine the choice of tax method between ad valorem tax and unit specific tax this study shows that governments endogenously choose the ad valorem tax method not because of a classic welfare reason but because it is a good strategy to compete for mobile consumers another key finding is that while governments are committed to the ad valorem tax method the choice leads to inferior outcome tax cutting competition becomes more serious when countries adopt ad valorem tax and competition in ad valorem tax results in smaller tax revenue than competition in unit tax

uncertainty and crude oil returns we use a copula approach to investigate the effect of uncertainty on crude oil returns using copulas to construct multivariate distributions of time series data permit the calculation of the dependence structure between the series independently of the marginal distributions further we implement the copula estimation using a rolling window method to allow for a time varying effect of equity and economic policy uncertainty on oil returns the results show that higher uncertainty as measured by equity and economic policy uncertainty indices significantly increase crude oil returns only during certain periods of time that is we find a positive dependence prior to the financial crisis and great recession interestingly estimation of the copula over the entire sample period leads to a negative dependence between the equity and economic policy indices and the crude oil return

modelling the term structure of interest rates an efficient nonparametric approach abstract we propose a new approach for estimating the coefficients of the term structure equation by means of the volatility of the interest rates and the slope of the yield curve one advantage of this approach consists in the fact that the drift and the market price of risk are jointly estimated and need not be individually specified we then generate trajectories in a test problem to investigate the finite properties of this approach our simulation results show that this new approach outperforms the classic nonparametric models in the literature finally an application to usa treasury bill data is also illustrated

competition for migrants in a federation tax or transfer competition this paper provides an analysis of competition for migrants competing in taxes transfers renders migration flows less more elastic with respect to changes in fiscal policy jurisdictions with aligned preferences i e jurisdictions that maximize the interest of the same type of households either mobile or immobile households prefer to reduce the competitive pressure and compete in taxes jurisdictions with distinct preferences on the other hand prefer to expose themselves to more competitive pressure and compete in transfers this paper offers insights into the optimal use and design of transfers and helps interpret existing empirical evidence

dependence structure and risk measure understanding the relationships among multivariate assets would help one greatly about how best to position one s investments and enhance one s financial risk protection we present a new method to model parametrically the dependence structure of stock index returns through a continuous distribution function which links an n dimensional density to its one dimensional margins the resulting multivariate model could be used in a wide range of financial applications focusing on risk management we show that a misspecification of the dependence structure introduces on average an error in value at risk estimates

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

optimum tariffs and retaliation revisited how country size matters in his seminal work on tariff retaliation johnson review of economic studies 21 1953 1954 showed that a country will win a bilateral tariff war if its relative monopoly monopsony power in world trade is sufficiently large however it is unclear from johnson s analysis and from subsequent research on the subject how this power is determined in general economic environments an important goal of this paper is to address this issue with the help of a neoclassical trade model in which country size is at centre stage it is shown that a sufficient condition for a country to prefer a non cooperative nash tariff equilibrium retaliation over free trade is that its relative size be sufficiently large the paper also refines the structure of the general trade model and generates additional characterization results on the importance of country size for best response tariff functions retaliatory tariffs and welfare

on the calculation of marginal effects in the bivariate probit model abstract we examine the effects of marginal changes in continuous variables on the joint conditional and marginal probabilities involved in the bivariate probit model and contrast them with the univariate probit case we provide an empirical application using canadian data

further evidence on segmentation in the treasury bill market abstract this paper shows that differences in supplies of 13 and 12 week treasury bills have statistically significant and economically meaningful effects on their yield differentials from january 1985 through october 1991 controlling for the general slope of the treasury bill yield curve the tendency of bills maturing at month ends to have lower yields and the tendency of bills whose supply is augmented by cash management bills to have higher yields the finding that market participants do not arbitrage away yield differentials that owe to differences in supplies indicates that demand curves for individual bills are downward sloping and that segmentation in the treasury bill market is more pervasive than previously documented

crisis and risk dependencies abstract the knowledge of the multivariate stochastic dependence between the returns of asset classes is of importance for many finance applications such as asset allocation or risk management by means of goodness of fit tests we analyze for a multitude of portfolios consisting of different asset classes whether the stochastic dependence between the portfolios constituents can be adequately described by multivariate versions of some standard parametric copula functions furthermore we test whether the stochastic dependence between the returns of different asset classes has changed during the recent financial crisis the main findings are first whether a specific copula assumption can be rejected or not crucially depends on the asset class and the time period considered second different goodness of fit tests for copulas can yield very different results and these differences can vary for different asset classes and for different tested copulas third even when using various goodness of fit tests for copulas it is not always possible to differentiate between various copula assumptions fourth during the financial crisis copula assumptions are more frequently rejected however the results also raise some concerns over the suitability of goodness of fit tests for copulas as a diagnostic tool for identifying stressed risk dependencies

information content and the speed of stock price adjustment the process by which security prices adjust to the release of new information is an area of study which has received much attention in accounting and finance in finance the main interest has been whether prices adjust in a rapid and unbiased manner to new information in accounting the focus has been more on whether different accounting disclosures have information content the study reported here combined both interests in that we investigated the speed of adjustment of releases of information which had different degrees of information content as illustrations dann mayers and rabb 1977 tested the sensitivity of a block trade trading rule to the speed of price adjustments this rule first suggested by grier and albin 1973 is based on the assumption that abnormal returns can be earned by purchasing shares at the block price and selling at that day s closing price dann mayers and rabb hereafter dmr found that unless one could purchase the stock within five minutes of the block trade the profitability of the grier and albin rule was seriously impaired they also found the market price to be an unbiased estimate of the closing price within 15 minutes of the block trade similarly hillmer and yu 1979 devised an alternative test for the speed of price adjustment based on a cumulative sum technique they illustrated the technique by testing for shifts in the parameters of the distributions of price changes and of transaction frequencies around five information events two earnings announcements and three defense

the creation and resolution of market uncertainty the impact of information releases on implied volatility we model and examine the impact of information releases on market uncertainty as mea sured by the implied standard deviation isd from option markets distinguishing between scheduled and unscheduled announcements we hypothesize that since the timing although not the content of scheduled announcements is known a priori the pre release isd will impound the anticipated impact of important releases on price volatility and that the isd will normally decline post release as this uncertainty is resolved conversely we hypothesize that the unexpected high volatility caused by major unscheduled releases will cause market participants to adjust upward their estimates of likely volatility over the remaining life of the option resulting in an increase in the isd our evidence supports both hypotheses the isds that we consider are from the t bond eurodollar and deutschemark options markets we examine scheduled macroeconomic news releases such as the employment report and the ppi we also find that the observed tendency for the isd to fall on fridays and rise on mondays is due to the weekday pattern of scheduled news releases

information shares in the us treasury market abstract this paper highlights the previously neglected role of the futures markets in us treasury price discovery the estimates of 5 and 10 year govpx spot market information shares typically fail to reach 50 from 1999 on the govpx information shares for the 2 year contract are higher than those of the 5 and 10 year maturities but also decline after 1998 relative bid ask spreads number of trades and realized volatility are statistically significant and explain up to 21 of daily information shares in roughly 1 4 of cases when public information is released the futures market gains information share but macroeconomic announcements rarely explain information shares independently of liquidity

market evidence against widespread point shaving in college basketball abstract this paper proposes using market based information to investigate the likelihood of widespread point shaving in college basketball games with strong favorites information embodied in pre game money lines facilitates the calculation of the market s expectation that the game will end with a strong favorite winning but not covering the point spread a result deemed suspicious in previous studies additional market based information embodied in second half lines reveal how the market s expectation about second half play differs from pre game expectations applying our methodology to college basketball reduces previous estimates of the percentage of games thought to be consistent with potential point shaving to insignificant levels our approach can apply to other sports in which strong favorites are common

money supply announcements and the market s perception of federal reserve policy this paper investigates the reason why innovations in money supply announcements cause interest rates to change the paper empirically discriminates between the liquidity premium and the expected inflation hypotheses by directly taking into account investors expectations regarding the federal reserve s monetary policy stance the results support the liquidity premium hypothesis and the model provides an explanation for the observed time variation in the response of interest rates to money announcement surprises copyright 1990 by ohio state university press

dynamic stochastic copula models estimation inference and applications we propose a new dynamic copula model where the parameter characterizing dependence follows an autoregressive process as this model class includes the gaussian copula with stochastic correlation process it can be viewed as a generalization of multivariate stochastic volatility models despite the complexity of the model the decoupling of marginals and dependence parameters facilitates estimation we propose estimation in two steps where rst the parameters of the marginal distributions are estimated and then those of the copula parameters of the latent processes volatilities and dependence are estimated using efficient importance sampling eis we discuss goodness of t tests and ways to forecast the dependence parameter for two bivariate stock index series we show that the proposed model outperforms standard competing models

measuring crisis risk using conditional copulas an empirical analysis of the 2008 shipping crisis the shipping crisis starting in 2008 was characterized by sharply decreasing freight rates and sharply increasing financing costs we analyze the dependence structure of these two risk factors employing a conditional copula model as conditioning factors we use the supply and demand of seaborne transportation we find that crisis risk strongly increased already about 1 year before the actual crisis outburst and that the shipping crisis was predominantly driven by an oversupply of transport capacity therefore market participants could have prevented or alleviated the consequences of the crisis by reducing the ordering and financing of new vessels

the high frequency impact of news on long term yields and forward rates is it real abstract macroeconomic news announcements move yields and forward rates on nominal and index linked bonds and inflation compensation this paper estimates the reactions using high frequency data on nominal and index linked bond yields allowing the effects of news announcements on real rates and inflation compensation to be parsed far more precisely than is possible using daily data long term nominal yields and forward rates are very sensitive to macroeconomic news announcements inflation compensation is sensitive to announcements about price indices and monetary policy however for news announcements about real economic activity such as nonfarm payrolls the vast majority of the sensitivity is concentrated in real rates accordingly most of the sizeable impact of news about real economic activity on the nominal term structure of interest rates represents changes in expected future real short term interest rates and or real risk premia rather than changes in expected future inflation and or inflation risk premia such sensitivity of real rates to macroeconomics news is hard to rationalize within the framework of existing macroeconomic models

is bad news cause of asymmetric volatility response a note this article uses a direct test of the impact of economic news on stock volatility the main interest is to test whether the asymmetric response of volatility can be due to the effect of bad news to do this this study takes items of news into account as exogenous variables the analysis is divided into two stages each of which uses different items of news as exogenous variables additional to the information provided by the residuals the first stage uses more exhaustively classified information whereas the second considers daily information as a global sign this study finds that bad news is responsible for most of the observed asymmetric behaviour of variance further this study detects that the gjr model adequately captures the impact of bad news when traders are not ready to carry out a time consuming analysis of the information

interdependence and dynamics in currency futures markets a multivariate analysis of intraday data abstract this paper investigates long term interdependencies and short term dynamics in currency futures utilizing intraday data for six major foreign currencies the british pound deutsche mark swiss franc australian dollar canadian dollar and japanese yen lack of cointegration ci among the foreign exchange futures is found to be the prevailing mode of behavior but some temporary deviations from the no ci condition are detected there is a notable overlap between detected ci relationships and the timing of policy changes world events and regime shifts indicating that the observed cis are event driven the robustness of the ci results is checked with respect to variations in the model lag structure data period sample horizon and currency basket grouping impulse response functions irfs reveal that currency markets are in general efficient and absorb new information within the day the interdependence among currencies is found to be asymmetric

bond yields and the federal reserve bond yields respond to policy decisions by the federal reserve and vice versa to learn about these responses i model a high frequency policy rule based on yield curve information and an arbitrage free bond market in continuous time the fed s target is a pure jump process jump intensities depend on the state of the economy and the meeting calendar of the federal open market committee the model has closed form solutions for yields as functions of a few state variables introducing monetary policy helps to match the whole yield curve because the target is an observable state variable that pins down its short end and introduces important seasonalities around fomc meetings the volatility of yields is snake shaped which the model explains with policy inertia the policy rule crucially depends on the two year yield and describes fed policy better than taylor rules

an examination of stock market return volatility during overnight and intraday periods 1964 1989 this paper examines the variance of hourly market returns during 1964 89 results indicate that return volatility falls from the opening hour until early afternoon and rises thereafter and is significantly greater for intraday versus overnight periods market variance is also shown to change significantly over time rising after nasdaq began in 1971 rising after trading in stock options began in 1973 falling after fixed commissions were eliminated in 1975 rising after trading in stock index futures was introduced in 1982 and falling after margin requirements for stock index futures became larger in 1988 copyright 1990 by american finance association

volatility in the foreign currency futures market we examine the volatility implications of around the clock foreign exchange trading with transaction data on futures contracts from the chicago mercantile exchange and the london international financial futures exchange we find higher u s european and u s japanese exchange rate volatilities during u s trading hours and higher european cross rate volatilities during european trading hours while the diclosure of private information through trading may partly explain these volatility patterns we conclude that the increased volatility is more likely driven by macroeconomic news announcements an analysis of inter and intraday data also reveals that volatility increases at times that coincide with the release of u s macroeconomic news article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

pricing interest rate options in a two factor cox ingersoll ross model of the term structure solutions are presented for prices on interest rate options in a two factor version of the cox ingersoll ross model of the term structure specific solutions are developed for caps on floating interest rates and for european options on discount bonds coupon bonds coupon bond futures and euro dollar futures the solutions for the options are expressed as multivariate integrals and we show how to reduce the calculations to univariate numerical integrations which can be calculated very quickly the two factor model provides more flexibility in fitting observed term structures and the fixed parameters of the model can be set to capture the variability of the term structure over time article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

specific and ad valorem tariffs are not equivalent in trade wars abstract this note argues that when two countries choose optimal tariffs in a trade war specific tariffs are not equivalent to ad valorem tariffs even if all markets are competitive in particular it shows that if a country s trading partner switches from a specific tariff to an ad valorem tariff that yields the same revenue at the initial trade point the former country has an incentive to lower its tariff when two identical countries choose the types and magnitudes of tariffs in a two stage game they will choose ad valorem tariffs making the trade war less severe

marginal effects of a bivariate binary choice model this paper discusses the copula based approach of a bivariate binary choice model we derive the marginal effects of explanatory variables on an outcome of interest both direct and indirect in the model we also show that the signs of the marginal effects are determined by the signs of the coefficient parameters a real data application is provided