Spanning and completeness in markets with contingent claims

We characterize financial markets that are “complete” or that contain portfolios which “span” all measurable functions of a particular asset payoffs, either finite and infinite dimensional. These results are then employed to describe the extent to which options trading is sufficient to complete markets, to investigate the existence of “efficient funds,” and to establish the extent of market completeness required to ensure the unanimity and irrelevance results of modern corporation finance.     

Efficiency characteristics of a market for state contingent claims

This paper concludes that a market for state-contingent claims (UK horserace betting) displays evidence of pervasive but heterogeneous forms of inefficiency, in significant contrast to earlier investigations. Using hitherto unavailable data, comparison of notional returns implicit in parallel sets of bookmaker and parimutuel odds identifies inefficiency in terms of zones of distinct but contrasting forms of cross-;market returns differential. The inefficiency is rationalized in terms of both buyer and supplier behaviour; its durability is explained in terms of limited arbitrage opportunities.     

A contingent grouping approach for stated preferences

This paper introduces the theoretical and statistical foundations of contingent grouping, a variant of attribute-based stated preference methods, and checks for its implementation difficulty. Respondents are asked to simply group a number of alternatives as better or worse than a baseline or the status quo situation. A Monte Carlo approach shows that it performs statistically better than contingent choice according to the MSE criterion, and worse than contingent ranking, while a case study suggests that contingent grouping is less difficult to answer than contingent ranking. Furthermore, contingent choice shows a greater consistency in preferences with contingent grouping than with contingent ranking.     

Commentary. 'Work first': workfare and the regulation of contingent labour markets

The paper presents a critical review of UK and US welfare-to-workstrategies, stressing their implications for changing formsof labour regulation. The favoured policy orientation - 'workfirst' - forcefully redistributes the risks and burdens of job-marketinstability from the state to unemployed individuals, the solutionto whose 'welfare dependency' is presented in terms of a one-waytransition into (low) waged work. At a systemic level, the analysissuggests that a regressive regulatory accommodation may be emergingbetween mandatory welfare-to-work programming on the one handand the lowest reaches of deregulated, 'flexible' labour marketson the other, as the destabilisation of welfare via work-activationmeasures creates a forced labour supply for contingent jobs.     

Using contingent valuation to elicit public preferences for water fluoridation

The methods and results of a contingent valuation survey to elicit public preferences for water fluoridation are reported. The study demonstrates that not only is it important to acknowledge that there will be losers from the introduction of such a programme but that losers must be allowed to express a value for the magnitude of their perceived loss. Two methods of valuing this loss are explored. Conventional willingness to accept compensation questions are compared with questions in which losers are asked to state their willingness to pay to prevent their water being fluoridated. The results provide tentative support for asking willingness to pay to prevent questions instead of willingness to accept questions when evaluating certain types of public good. The issue of protest responses in contingent valuation surveys is also highlighted and discussed.     

Asset price bubbles in Arrow-Debreu and sequential equilibrium

Summary. Price bubbles in an Arrow-Debreu equilibrium in an infinite-time economy are a manifestation of lack of countable additivity of valuation of assets. In contrast, the known examples of price bubbles in a sequential equilibrium in infinite time cannot be attributed to the lack of countable additivity of valuation. In this paper we develop a theory of valuation of assets in sequential markets (with no uncertainty) and study the nature of price bubbles in light of this theory. We define a payoff pricing operator that maps a sequence of payoffs to the minimum cost of an asset holding strategy that generates it. We show that the payoff pricing functional is linear and countably additive on the set of positive payoffs if and only if there is no Ponzi scheme, provided that there is no restriction on long positions in the assets. In the known examples of equilibrium price bubbles in sequential markets valuation is linear and countably additive. The presence of a price bubble means that the dividends of an asset can be purchased in sequential markets at a cost lower than the asset's price. We present further examples of equilibrium price bubbles in which valuation is nonlinear, or linear but not countably additive.     

Generous actors,selfish actions: markets with other-regarding preferences

This paper points out that classical competitive outcomes arise in two different market environments even if agents have non-classical preferences. Consumers with separable, other-regarding preferences behave as if they have classical preferences in competitive equilibrium. These outcomes need not be efficient, but under plausible conditions will be efficient following a redistribution of income. In simple double-auction environments competitive outcomes arise under a wide range of assumptions on preferences even without assuming separability. I discuss the importance of the domain of definition of preferences and how the preferences present in the economy influence the performance of the trading institution.

Comparing consumers’ preferences and willingness to pay for non-GM oil using a contingent valuation approach

A contingent valuation method is used in this paper to compare Chinese and Japanese consumers’ preferences and willingness to pay for non-GM vegetable oil. An often ignored issue—the scale factor in a discrete choice model—is explicitly considered, and parameter equality for different data sets is formally tested before reaching a conclusion. Results indicate that in these two countries consumers’ attitude factors and demographic traits have significantly different effects on their purchase intentions, and on average, Japanese consumers are willing to pay a much higher premium for non-GM vegetable oil than Chinese consumers.      

Real exchange rates, preferences, and incomplete markets: evidence, 1961–2001

Abstract.  Many international macroeconomic models link the real exchange rate to a ratio of marginal utilities. We examine this link empirically, allowing the marginal utility of consumption to depend on government expenditure, real money balances, or external habit. We also consider two environments with incomplete asset markets; one with exogenously missing markets but an endogenous discount rate that anchors the distribution of wealth and one with endogenous market segmentation. Although none of these satisfies theoretical and over‐identifying restrictions for every country, utility with external habit persistence provides the best match with real exchange rates for OECD countries between 1961 and 2001. JEL classification: F41     

Perfectly competitive markets as the limits of cournot markets

A perfectly competitive, partial equilibrium market for a single homogeneous good with a (bounded) continuum of infinitesimal firms is considered. Cost functions are essentially unrestricted and are allowed to vary smoothly across firms. A sequence (net) of Cournot markets (each with a finite number of firms) which converge smoothly to the perfectly competitive limit in terms of both the inverse demand functions and the distributioon of firm technologies is introduced and it is shown that all markets sufficiently far along the sequence have a Cournot equilibrium and all the Cournot equilibria converge to the perfectly competitive equilibrium of the limit market.     

Matching and bargaining models of markets: approximating small markets by large markets

Summary. We show that the equilibrium of a matching and bargaining model of a market in which there is a finite number of agents at each date need not be near the equilibrium of a market with a continuum of agents, although matching probabilities are the same in both markets. Holding the matching process fixed, as the finite market becomes large its equilibrium approaches the equilibrium of its continuum limit.Received: January 22, 1996; revised version: September 24, 1996This revised version was published online in February 2005 with corrections to the cover date.     

Aggregation and the analysis of markets

The case for aggregating relations in Economics is often tenuous. This paper shows that under conditions of genuine ignorance and real historical time, it is not possible to aggregate from individual demand and supply functions to market-level demand and supply functions. Hence the traditional analysis of markets based on market demand and market supply is called into question. Two proposals for replacing the traditional market analysis are suggested that do not rely on aggregation within markets.     

Patent claims and economic growth

This study introduces a blocking patent on horizontal R&D into the endogenous growth model of Chu et al. (2012), which features a blocking patent on vertical R&D. Results show that strengthening patent protection on horizontal R&D promotes vertical innovation (quality improvement) but hinders horizontal innovation (variety expansion). This effect of a horizontal blocking patent on directionality of innovation is opposite to that of the vertical blocking patent analyzed by Chu et al. (2012). Results also show that under mild conditions, strengthening a blocking patent on horizontal innovation as well as on vertical innovation can increase economic growth and social welfare.     

Cognitive ability and scale bias in the contingent valuation method

This study investigates whether or not the scale bias found in contingent valuation (CVM) studies on mortality risk reductions is a result of cognitive constraints among respondents. Scale bias refers to insensitivity and non-near-proportionality of the respondents’ willingness to pay (WTP) to the size of the risk reduction. Two hundred Swedish students participated in an experiment in which their cognitive ability was tested before they took part in a CVM-study asking them about their WTP to reduce bus-mortality risk. The results imply that WTP answers from respondents with a higher cognitive ability are less flawed by scale bias.     

Knowledge and markets

An economy is a coordinated system of distributed knowledge. Economic evolution occurs as knowledge grows and the structure of the system changes. This paper is about the role of markets in this process. Traditionally, the theory of markets has not been a central feature of evolutionary economics. This seems to be due to the orthodox view of markets as information-processing mechanisms for finding equilibria. But in economic evolution markets are actually knowledge-structuring mechanisms. What then is the relation between knowledge, information, markets and mechanisms? I argue that an evolutionary theory of markets, in the manner of Loasby (1999), requires a clear formulation of these relations. I suggest that a conception of knowledge and markets in terms of a graphical theory of complex systems furnishes precisely this.     

Background risk and the demand for state-contingent claims

Summary. We consider the demand for state-contingent claims, in the presence of an independent zero-mean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she chooses a demand function for contingent claims with a smaller slope everywhere, given a simple increase in background risk. We show that the conditions for standard risk aversion, that is positive, declining absolute risk aversion and prudence, are necessary and sufficient for generalized risk aversion.Received: 13 February 2002, Revised: 10 February 2003, JEL Classification Numbers: D52, D81, G11. Correspondence to: Guenter FrankeWe are grateful to Louis Eeckhoudt, Christian Gollier, Harris Schlesinger and an unknown referee for valuable comments.     

Imports and the structure of retail markets

Abstract We construct a model of trade with heterogeneous retailers to examine the effects of trade liberalization on retail market structure, imports and social welfare. We are especially interested in investigating the transmission of lower import prices into consumer prices and the effects of retail market regulation. The paper shows that changes in import prices may have large effects on consumer prices and import volumes when changes in retail market structure are taken into account, and that restrictions on retailing, as they occur in several countries, may significantly alter this transmission mechanism by reducing imports and raising consumer prices.     

The relationship between developed equity markets and the Pacific Basin's emerging equity markets

Using a trivariate vector autoregression (VAR) model with a proper control for heteroscedasticity, this paper investigates the relationships between the two largest equity markets in the world—the U.S. and Japan—and the four Asian emerging equity markets: Hong Kong, Korea, Singapore, and Taiwan. Evidence indicates that the links between the developed markets and the Asian emerging markets (AEMs) began to increase after the stock market crash in October 1987, and have significantly intensified since the outbreak of the Asian financial crisis in July 1997.     

Financial markets and the post-crisis scenario

Starting from August 2007, the FED intervened by injecting liquidity in the inter-banking market and reducing interest rates. Day after day, the financial markets register negative trends and rallies. This is not due to events which are particularly related to the market itself. This appeared in the days when there were government interventions, when everybody expected a positive sign in the financial market but a negative sign occurred. Sometimes, this is due to the intensity of actions taken by the governments. The markets always expect appropriate interventions (in terms of intensity). Looking at these market reactions (in unexpected signs) after each government action, we can suppose that policy makers underestimate the intensity of this crisis. The capacity of making enforcement on the system should avoid underlining the side of governance rules which will never be precise. Being able to count on an active control of the market dealers, broadly speaking is a way of giving active confidence to individual/institutional agents who decide the allocations of saving in the financial market. There is no such confidence at the moment, if one focuses only on the definitions of new rules. If one starts from existing rules and does continuous monitoring so that they are applied adequately at crucial moments, then one could reduce the possibility of facing new exceeding volatilities of banking securities in the stock market. This work is focused on understanding how governance as well as central banks’ policy impact on the crisis, as well as possible future scenarios.