Regime switching in the yield curve

The article investigates the effect of interest‐rate variance on the shape of the yield curve with the use of a bivariate two‐state Markov switching model for the short‐rate changes and the yield curve slope. The two states are characterized by the variance of the short‐rate changes: low and high variance. In the high‐variance regime the yield curve becomes steeper with the interest‐rate variance; in the low‐variance regime the slope is independent hereof. A nonswitching specification amounts to averaging across the two states. The economy is in the high‐variance state during unusual economic periods. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:315–336, 2004     

The risk-return trade-off in human capital investment

In this paper, we analyze investments in human capital in a way which is standard for financial assets, but not (yet) for human capital assets. We study mean-variance plots of human capital assets. We compare the properties of human capital returns using a performance measure and by using tests for mean-variance spanning. Fields differ strongly not only in common rates of return, but also in return per unit of risk. We identify a range of educations that are efficient in terms of investment goods, and a range of educations that may be chosen for consumption purposes.     

Implied Volatility of Interest Rate Options: An Empirical Investigation of the Market Model

We analyze the empirical properties of the volatilityimplied in options on the 13-week US Treasury bill rate. These options havenot been studied previously. It is shown that a European style put optionon the interest rate is equivalent to a call option on a zero-coupon bond.We apply the LIBOR market model and conduct a battery of validity tests tocompare three different volatility specifications: contact, affine, and exponentialvolatility. It appears that the additional parameter in the affine and theexponential volatility function is not justified. Overall, the LIBOR marketmodel fares well in describing these options.     

An Anatomy of Price Dynamics in Illiquid Markets: Analysis and Evidence from Local Housing Markets

This research analyzes the dynamic properties of the difference equation that arises when markets exhibit serial correlation and mean reversion. We identify the correlation and reversion parameters for which prices will overshoot equilibrium ("cycles") and/or diverge permanently from equilibrium. We then estimate the serial correlation and mean reversion coefficients from a large panel data set of 62 metro areas from 1979 to 1995 conditional on a set of economic variables that proxy for information costs, supply costs and expectations. Serial correlation is higher in metro areas with higher real incomes, population growth and real construction costs. Mean reversion is greater in large metro areas and faster growing cities with lower construction costs. The average fitted values for mean reversion and serial correlation lie in the convergent oscillatory region, but specific observations fall in both the damped and oscillatory regions and in both the convergent and divergent regions. Thus, the dynamic properties of housing markets are specific to the given time and location being considered.     

Are impatient farmers more risk-averse? Evidence from a lab-in-the-field experiment in rural Uganda

Based on data from a field-experiment in rural Uganda, we show that impatient farmers are more risk-averse than patient farmers. We relied on a simplified version of the Convex Time Budget (CTB) method to elicit farmers’ time preferences and on an independent method for eliciting their risk-preferences. We report two important findings. First, we show that our simplified CTB method applied to farmers from Uganda replicates the key findings of Andreoni and Sprenger’s lab experiments that involved student subjects. Second, we establish the existence of a negative correlation between risk tolerance and impatience, based on two independent measures.     

Lone Mothers: What is to be done?

This Dialogue presents the views of four authors, from the US, the UK, and Norway, on the best policies to help lone mothers. Lone mothers face an inevitable dilemma in allocating their time between earning income and caring for their children. The low-earning capacity of women in an unequal labor market exacerbates the problem, causing material hardship for many lone mothers and their families. The policy solutions proposed lie along a spectrum, ranging from those that seek to enable all lone mothers to take employment to those that aim to let mothers choose whether to take employment or care for their children themselves. Other policies discussed concern ways to value and support caregiving, improve the low-wage labor market for women, and provide a set of income supports that would both boost income and provide time to care for children.     

Aggregate supply response in Tanzanian agriculture

Tanzania is among the many African countries that have engaged in agricultural liberalization since the mid-1980s. in the hope that reforms that introduce price incentives and efficient marketing will encourage producers to respond. This paper assesses that claim by examining the supply response of agricultural output in Tanzania. Our estimates suggest that aggregate agricultural supply response is quite high so that the potential for agricultural sector response to liberalization of agricultural prices and marketing may be quite significant. The long-run elasticity of aggregate food crop output to relative prices was almost unity. Short-run supply responses were estimated at about 0.35 for aggregate food crops and for all (food and export) crops. Liberalization of agricultural markets, where it increases the effective prices paid to farmers, can be effective in promoting production, although complementary interventions, to improve infrastructure, marketing, access to inputs and credit, improved production technology etc, are probably necessary.