Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields

Differences between yields on comparable‐maturity U.S. Treasury nominal and real debt, the so‐called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage‐free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long‐term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average.     

Central Bank Policy Paths and Market Forward Rates: A Simple Model

Increasingly many central banks announce likely paths for future policy rates. Recent experience suggests that market forward rates can differ substantially from those announced. Models commonly adopted in policy analysis ignore such differences. This paper studies a simple model that can capture deviations between announced paths and market forward rates. We detail the macroeconomic transmission of such deviations and show how the model can inform policy deliberations.     

In Search of Distress Risk

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks whose failure probability, estimated from a dynamic logit model using accounting and market variables, is high. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small‐cap risk factors than stocks with low failure risk. These patterns are more pronounced for stocks with possible informational or arbitrage‐related frictions. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.     

Multi-Product Firms and Flexible Manufacturing in the Global Economy

We present a new model of multi-product firms (MPFs) and flexible manufacturing, and explore its implications in partial and general oligopolistic equilibrium. Globalization affects the scale and scope (or intensive margin and intra-firm extensive margin) of MPFs through a competition effect and a demand effect. The model highlights a new source of gains from trade: productivity increases as firms become "leaner and meaner", concentrating on their core competence; but also a new source of losses from trade: product variety may fall. Our results also hold under free entry, which allows in addition for adjustment along the traditional inter-firm extensive margin.     

Are Options on Index Futures Profitable for Risk‐Averse Investors? Empirical Evidence

American options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2009) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while violations of the lower bounds by ask prices are infrequent. In out‐of‐sample tests of stochastic dominance, the writing of options that violate the upper bound increases the expected utility of any risk‐averse investor holding the market and cash, net of transaction costs and bid‐ask spreads. The results are economically significant and robust.     

Intraday Price Change and Trading Volume Relations in the Stock and Stock Option Markets

This study investigates intraday relations between price changes and trading volume of options and stocks for a sample of firms whose options traded on the CBOE during the first quarter of 1986. After purging the price change series of the effects of bid/ask spreads, multivariate time-series analysis is used to estimate the lead/lag relation between the price changes in the option and stock markets. The results indicate that price changes in the stock market lead the option market by as much as fifteen minutes. The analysis of trading volume indicates that the stock market lead may be even longer.     

BOOMING SECTOR AND WAGE EFFECTS: AN EMPIRICAL ANALYSIS ON NORWEGIAN DATA

Within the framework of a segmented labour market model, andunder the assumption of market clearing wages in all sub-markets,this paper analyzes demand and cost-of-living effects whicha booming sector may create. The tests are based on data beforeand after the most intensive building-up period of the Norwegianpetroleum sector The empirical results indicate significantdemand effects for the most petroleum relevant occupations,and also positive cost-of-living effects in areas which areregionally close to this sector Overall there is evidence thatthe Norwegian petroleum sector has caused weak manufacturingperformance     

Agrarian Crisis and Agrarian Questions in India

This essay reviews five recent books concerned with different aspects of the agrarian crisis and agrarian questions in India. Each book deals, implicitly or explicitly, with specific facets of these issues. Specific regional patterns of highly exploitative agrarian capitalist developments and the role of agro‐commercial capital are analysed by the books. The essay argues that the agrarian crisis is class specific and that the capitalist farming classes are, in the main, able to successfully accumulate, although uneven development across India makes generalization difficult. The review concludes with some overall perspectives on agrarian transition in India.     

Recovering Probability Distributions from Option Prices

This article derives underlying asset risk-neutral probability distributions of European options on the S&P 500 index. Nonparametric methods are used to choose probabilities that minimize an objective function subject to requiring that the probabilities are consistent with observed option and underlying asset prices. Alternative optimization specifications produce approximately the same implied distributions. A new and fast optimization technique for estimating probability distributions based on maximizing the smoothness of the resulting distribution is proposed. Since the crash, the risk-neutral probability of a three (four) standard deviation decline in the index (about ?36 percent (?46 percent) over a year) is about 10 (100) times more likely than under the assumption of lognormality.