The Term Structure of Interest Rates in a Small Open Economy: A Stochastic Analysis

This article employs a rational expectations IS-LM model with price adjustment to study the effect of domestic monetary and fiscal policy and world interest rate disturbances on the real and nominal small open economy term structure of interest rates. The impact of both temporary and permanent shocks are investigated. Notable results include the fact that monetary expansions lead to positive yield curves, while the implications of fiscal expansions and increases in the world interest rate depend crucially on the duration of the shock.     

On the Hybrid Nature of REITs

The consensus that emerges from the current research on the linkage between securitized and direct investment in real estate is that direct (private) real estate returns play a relatively minor role in the real estate investment trust (REIT) return generating process. However, this result may at least partially be due to the coarseness of the measures of direct real estate returns or the relatively short return horizons used in previous studies. This study takes a different and unique perspective. Unlike earlier studies we do not use aggregated, average appraisal based returns on direct real estate investment. Instead, we use the MIT TBI indexes, which are transaction based price indexes, available both on the aggregate and sub-index levels. We find that the relation between REIT and direct real estate returns appears to be stronger at longer horizons. More specifically, using a cointegration framework, we find robust evidence that REITs and the underlying real estate are related and that they share a long run equilibrium. Interestingly, we find that both REITs and direct real estate returns adjust towards this long run relationship. When we examine property type level data we find similar results.     

Heavily regulated,but promising prospects: Entry in the German Express Coach Market

Domestic express coach services in Germany have long been heavily restricted by regulation, although offerings comparable to countries like, for example, Great Britain or Sweden bear substantial opportunities for competition, the environment, and mobility. In this paper, we motivate market entry in the German express coach market for local public and integrated transport companies by high profitability rates in other countries and the availability of bus facilities and skills. This is followed by the evaluation of supply and demand. Supply is represented by an analysis of external and internal costs showing that express coaches have significant cost advantages that are intensified by the possible internalization of external costs. Demand is represented by a survey of customers that is evaluated with a conjoint analysis. Our results suggest a market share for express coach services in Germany of at least 5.3%.     

An extension of the multi-output state-contingent production model

This paper presents new developments on the state-contingent theory of production under uncertainty with stochastic prices. Our main purpose is to generalize the usual finite discrete state-contingent production model to infinite dimensional, possibly uncountable spaces which look like a more realistic framework. Usual duality results are established in this general context, shedding some light on the links between risk-neutral probabilities and shadow prices. A direct generalized production risk premium is defined and is shown to be independent of the inputs level when the technology is output translation homothetic. In such a case, the technology exhibits constant absolute riskiness. We thank Bob Chambers for his helpful comments.     

Home-field advantage or a matter of ambiguity aversion? Local bias among German individual investors

This paper investigates whether familiarity induced by ambiguity aversion can help explaining the local bias phenomenon among individual investors. Using geographic closeness as a proxy for investor familiarity, we find that investors pull out of (unfamiliar) remote stocks and pour into (familiar) local stocks during times of increased market uncertainty. Moreover, the magnitude of this ‘flight to familiarity’ increases in the spread of an investor's ambiguity (about expected returns) between local and remote stocks. Our results prove robust to a number of alternative explanations of local bias. Specifically, we rule out a ‘home-field advantage’, where investors are able to translate information advantages about nearby companies into excess returns on their local stockholdings. We conclude that individual investors’ local bias is induced by ambiguity aversion in the portfolio selection process rather than a trading strategy based on superior information about local companies.     

Numerical evaluation of the critical price and American options

An approximate solution to the American put value is proposed and implemented numerically. Relaxation techniques enable the critical price to be determined with high accuracy. The method uses a modification of the quadratic approximation of MacMillan and Barone-Adesi and Whaley which gives an expression for the critical price. Numerical experimentation and iterative methods quickly provide highly accurate solutions.