PRICING CALLABLE BONDS BY MEANS OF GREEN'S FUNCTION1

This paper derives a closed-form solutin for the price of the European and semi-Amirican callable bond for two popular one-factor models of the term structure of interest rates which have been proposed by Vasicek as well as Cox, Ingersoll, and Ross. the price is derived by means of repeated use of Green's function, which, in turn, is derived from a series solution of the partial differential equation to value a discount bond. the boundary conditions which lead to the well-known formulae for the price of a discount bond are also identified. the algorithm to implement the explicit solution relies on numerical quadrature involving Green's function. It offers both higher accuracy and higher speed of computation than finite difference methods, which suffer from numerical instabilites due to discontinuous boundary values. For suitably small time steps, the proposed algorithm can also be applied to American callable bonds or to any American-type option with Green's function being explicitly known.     

Idiosyncratic risk and expected returns in frontier markets: Evidence from GCC

We investigate the pricing of idiosyncratic volatility of seven frontier markets in six GCC countries. We find a significant (marginal) negative relationship between expected returns and lagged idiosyncratic volatility for individual stocks in Saudi Arabia (Qatar) but none in Kuwait and Abu Dhabi. However, when we estimate conditional idiosyncratic volatility either by EGARCH or AR Models, the relationship turns positive. Introducing unexpected idiosyncratic volatility as an explanatory variable to control for any unexpected returns uncovers the true relationship between expected idiosyncratic volatility and expected returns. The evidence turns out to be robust for return reversals and other control variables. Moreover, the pricing of idiosyncratic risk is less evident in higher country governance and seems to be unrelated to the degree of financial development.     

10 Jahre EZB – Selbstbewusstsein gerechtfertigt

Am 1. Juni 1998 nahm die Europ?ische Zentralbank ihre T?tigkeit auf. In den zehn Jahren ihres Bestehens hatte sie bereits viele Herausforderungen zu bew?ltigen. Wie ist ihre Handlungsweise in der aktuellen Finanzkrise zu bewerten? Welche Bedeutung kommt der Geldmengensteuerung zu? Inwieweit konnte das Ziel Preisstabilit?t erreicht werden? Dr. Andreas Bley, 42, ist Referent in der Abteilung Volkswirtschaft im Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (BVR).     

Did Partial Globalization Increase Inequality? The Case of the Latin American Periphery, 1950-2000

Inequality is an important threat to the globalization of theworld economy that we experience today. This contribution usesthe coefficient of height variation as a measure of inequality.This indicator covers not only wage recipients, but also theselfemployed, the unemployed, housewives, children, and othergroups who may not participate in a market economy, for theperiod 1950–79, for which income inequality data is mostlyunavailable or inconsistent. It turns out that within-countryinequality is higher in time periods of greater openness. Thisresult is confirmed for the time period 1950–2000, anda much broader model. (JEL I12, I32, N33)     

The Effects of Business Cycles on Growth - Time Series Evidence for the G7-countries Using Survey-based Measures of the Business Cycle

The paper analyses whether business cycle fluctuations affectlong-run growth. This hypothesis is tested using quarterly timeseries for the G7-countries. A vector-autoregressive model containingtotal factor productivity and a survey-based direct measureof the business cycle is estimated. In this vector-autoregression,technology and business cycle shocks are identified based onthe assumption that productivity-improving measures need sometime and, thus, there is no contemporaneous response of productivityto a business cycle innovation. The results suggest that positivebusiness cycles shocks have a small negative impact on long-runproductivity. However, the results appear to be not robust againstchanges in the empirical model.(JEL E32, O41)     

Reflections on the current fashion for central bank independence

This paper challenges the time-inconsistency case for centralbank independence. It argues that the time-inconsistency literaturenot only seriously confuses the substance of the rules vs discretiondebate, but also posits an implausible view of monetary policy.Most worryingly, the inflationary bias featured prominentlyin the time-inconsistency literature has encouraged the developmentof a dangerously one-sided approach to central bank independencewhich entirely ignores the potential risks involved in maximisingcentral bankers' latitude for discretion. The analysis showsthat a more balanced and symmetric approach to central bankindependence is urgently needed. The views of Maynard Keynesand Milton Friedman are shown to shed some illuminating anddisconcerting light on a fashionable free-lunch promise thatis based on rather shallow theoretical foundations and empiricalevidence.     

European stock market integration: Fact or fiction?

The objective of this study is to determine the dynamics and contemporaneous interactions of Euro stock markets at the country and economic sector level. Overall test results have revealed the time-varying nature of the financial market integration process. Promoted by the anticipation and subsequently the formation of the currency union Euro stock markets became more integrated between 1998 and 2006. Monetary policy convergence, however, may have facilitated the divergence of economic variables. Evidence is found that return behavior is changing and stock markets within the Euro zone are starting to drift apart.     

Modified Stage‐Gate® Regimes in New Product Development*

The purpose of this research was to explore the nature of the Stage‐Gate^®process in the context of innovative projects that not only vary in new product technology (i.e., radical versus incremental technology) but that also involve significant new product development technology (i.e., new virtual teaming hardware‐software systems). Results indicate that firms modify their formal development regimes to improve the efficiency of this process while not significantly sacrificing product novelty (i.e., the degree to which new technology is incorporated in the new offering). Four hypotheses were developed and probed using 72 automotive engineering managers involved in supervision of the new product development process. There was substantial evidence to creatively replicate results from previous benchmarking studies; for example, 48.6% of respondents say their companies used a traditional Stage‐Gate^®process, and 60% of these new products were considered to be a commercial success. About a third of respondents said their companies are now using a modified Stage‐Gate^®process for new product development. Auto companies that have modified their Stage‐Gate^®procedures are also significantly more likely to report (1) use of virtual teams; (2) adoption of collaborative and virtual new product development software supporting tools; (3) having formalized strategies in place specifically to guide the new product development process; and (4) having adopted structured processes used to guide the new product development process. It was found that the most significant difference in use of phases or gates in the new product development process with radical new technology occurs when informal and formal phasing processes are compared, with normal Stage‐Gate^®usage scoring highest for technology departures in new products. Modified Stage‐Gate^®had a significant, indirect impact on organizational effectiveness. These findings, taken together, suggest companies optimize trade‐offs between cost and quality after they graduate from more typical stage‐process management to modified regimes. Implications for future research and management of this challenging process are discussed. In general, it was found that the long‐standing goal of 50% reduction in product development time without sacrificing other development goals (e.g., quality, novelty) is finally within practical reach of many firms. Innovative firms are not just those with new products but also those that can modify their formal development process to accelerate change.