Option pricing with a non‐zero lower bound on stock price

Black, F. and Scholes, M. (1973) assume a geometric Brownian motion for stock prices and therefore a normal distribution for stock returns. In this article a simple alternative model to Black and Scholes (1973) is presented by assuming a non‐zero lower bound on stock prices. The proposed stock price dynamics simultaneously accommodate skewness and excess kurtosis in stock returns. The feasibility of the proposed model is assessed by simulation and maximum likelihood estimation of the return probability density. The proposed model is easily applicable to existing option pricing models and may provide improved precision in option pricing. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:775–794, 2005     

Factor Substitution in U.S. Manufacturing: Does Plant Size Matter?

We use micro data for 10,412 U.S. manufacturing plants to estimate the degrees of factor substitution by industry and by plant size. We find that (1) capital, labor, energy and materials are substitutes in production, and (2) the degrees of substitution among inputs are quite similar across plant sizes in a majority of industries. Two important implications of these findings are that (1) small plants are typically as flexible as large plants in factor substitution; consequently, economic policies such energy conservation policies that result in rising energy prices would not cause negative effects on either large or small U.S. manufacturing plants; and (2) since energy and capital are found to be substitutes, the 1973 energy crisis is unlikely to be a significant factor contributing to the post 1973 productivity slowdown.     

Employment trends in the USA,Japan and the EC

Since 1973, the underlying tendency in most industrial countries has been for unemployment to increase strongly; the rate of unemployment rose noticeably in almost all instances. Nevertheless, trends in employment were much more varled, with significant differences visible between individual countries. The following article is a summary of the findings of a report concerning the reasons underlying differences between employment trends in the USA, Japan and the EC since 1973.¹     

Disaccord on seabed mining

Continuing the discussions under way since 1973, the Third United Nations Conference on the Law of the Sea (UNCLOS III) held the first half of its ninth session from March 3 to April 4 in New York. What has been achieved at this meeting?     

Development aid taxation act amendment

One of the important tasks which the new Federal Government will have to tackle during 1973 is the amendment of the Entwicklungshilfe-Steuergesetz (Development Aid Taxation Act). The following article reviews the aims of the Act and suggests modifications necessary for improving its effectiveness.     

The GDR’s foreign trade policy

Before the German Democratic Republic (GDR) achieved worldwide political recognition in 1972 and 1973 many Western observers were of the opinion that the GDR’s trade with Western industrialised countries was still not very developed. A closer look at this field of activity shows, however, a different picture.     

Doctrine of relative purchasing power parity under fixed and flexible exchange rates reconsidered

The doctrine of relative purchasing power parity during periods of fixed and flexible exchange rates is investigated. Using cointegration techniques and data for the Group of Seven countries, a subset of the results suggests, that purchasing power parity held only between the United States and the United Kingdom over the period 1957 QI to 1973 QII. Different results are obtained for the 1973 QIII to 1990 QIV period. Based on the maximum likelihood approach of Johansen and Juselius and an error correction model, it is concluded that purchasing power parity held between the United States and Canada, the United States and France, the United States and Italy, and the United States and the United Kingdom.     

Nonparametric American option pricing

A nonparametric method is introduced to accurately price American-style contingent claims. This method uses only historical stock price data, not option price data, to generate the American option price. The accuracy of this method is tested in a controlled experimental environment under both Black, F and Scholes, M (1973) and Heston, S (1993) assumptions, and an error-metric analysis is performed. These numerical experiments demonstrate that this method is an accurate and precise method of pricing American options under a variety of market conditions. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:717–748, 2008     

Currency distribution and forward cover in foreign trade: Sweden revisited, 1973

New data on currency distribution in Sweden's foreign trade payments for 1973 are presented and compared with data from an earlier survey for 1968. The basic pattern remains unchanged, invoicing being predominantly made in local currencies. The limited use of U.S. dollars, and other third-country currencies, has remained approximately the same over the five-year period, though with a marked shift from pounds to dollars and D-marks. Both the 1968 year of fixed parities and the 1973 year of floating exchange rates display a symmetric payments system, without any particular currency playing the role of ‘international money’ in private transactions. Data are also supplied for the total volume of forward transactions in Sweden from 1966–1974. As anticipated in foreign exchange theory, forward covering of trade payments has increased sharply since the floating of exchange rates in 1973.     

The identification of destabilizing foreign exchange speculation

This paper develops a technique for directly identifying destabilizing speculation. It shows that previous techniques that have been used in the empirical foreign exchange market literature cannot correctly identify whether or not destabilizing speculation has occurred. It is shown that the ‘true’ underlying model that determines the exchange rate (or any price) must be known before the stability of speculation can be determined empirically. Two appendices are included that (a) present an example of a correct empirical test for the 1973–1975 foreign exchange markets, and (b) show how a rational expectations framework could be used to analyze the question.     

Productivity Accounting in Vertically (Hyper‐)integrated Terms: Bridging the Gap between Theory and Empirics

The present paper is a methodological contribution introducing a disaggregated physical productivity accounting framework in vertically (hyper‐)integrated terms, establishing a direct correspondence between Supply–Use Tables and Pasinetti's (1973, 1988) theoretical magnitudes. As an empirical application, we computed productivity indicators and indexes of direction of technical change at the subsystem level for the case of Italy during 1999–2007. Our findings suggest that: (a) only 60 per cent of productivity growth accrued to real wages, (b) the degree of mechanization increased, (c) the most dynamic subsystems correspond to consolidated sectors, and (d) technical change has almost always been capital intensity increasing.     

A non-traded input, substitution and effective protection

In this paper, we investigate whether the ERP theory will work in the sense defined by Bhagwati and Srinivasan (1973) under their restriction on tariff change in a general equilibrium model with two domestically produced tradeables, a non-traded intermediate input and an imported intermediate input, for the case of the direct-plus-indirect nominal value added and for that of the direct nominal value added, respectively.     

Effects of Repatriations Risk on the Choice of Entry Modes Used by U.S. Manufacturing Firms in LDCs

The relationship between repatriations risk and modes of entry continues to interest researchers and practitioners alike. Frequently the structure of functions necessary to develop an efficient and effective international organization are determined by the mode of entry used. Repatriations risk in less developed countries (LDCs) is still a reality especially in light of their increasing debt burden. The objective of this study was to determine whether U.S. manufacturing firms used exporting instead of licensing as a hedge against repatriations risk in developing country markets. Using time-series (1973-86) and cross-sectional data (20 nations), the findings suggest that exporting was used to hedge against repatriations risk in LDCs.     

Preparations for the nixon round

The next round of GATT negotiations—the so-called “Nixon Round”—will be opened at the ministerial level in Tokyo on September 12–14, 1973, and probably continue for several years in Geneva. Less developed countries (LDCs) which have not joined GATT but nevertheless wish to participate in the negotiations are to be invited for the first time. UNCTAD and IMF will be among the most directly engaged observers.     

US economic outlock for 1973

The electorate has spoken — alea jacta est — re-electing President Nixon in an old-fashioned landslide for another four years’ term. What is to be expected in the internal and external economic sphere during 1973?     

Output-inflation tradeoffs in 34 countries

This article examines the responsiveness of real output to the variability of inflation and aggregate demand. In the manner of Lucas (1973), estimates of the output-inflation tradeoff are computed for a large sample of countries. This measure is then correlated with the variances of the inflation rate and the growth rate in nominal income. Because differences in inflation variance (and hence the tradeoff) are viewed as the outcomes of differences in demand variance, correlations between these two variables are also reported. Cross-time and cross-country results provide a good measure of support for Lucas and the notion that attempts to exploit the tradeoff weaken it.     

Pricing FTSE 100 index options under stochastic volatility

The autoregressive conditional heteroscedasticity/generalized autoregressive conditional heteroscedasticity (ARCH/GARCH) literature and studies of implied volatility clearly show that volatility changes over time. This article investigates the improvement in the pricing of Financial Times‐Stock Exchange (FTSE) 100 index options when stochastic volatility is taken into account. The major tool for this analysis is Heston’s (1993) stochastic volatility option pricing formula, which allows for systematic volatility risk and arbitrary correlation between underlying returns and volatility. The results reveal significant evidence of stochastic volatility implicit in option prices, suggesting that this phenomenon is essential to improving the performance of the Black–Scholes model (Black & Scholes, 1973) for FTSE 100 index options. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:197–211, 2001     

新台币升值对台湾出口的影响及实证分析

通过对1973～1992年新台币汇率变化与台湾出口之间的关系两个变量的单位根检验和协整分析,得出以下结论:台湾的汇率与其出口之间不存在长期稳定的协整关系,新台币的升值没有立即抑制台湾的出口,并且也未对其产生滞后影响,从而打破了传统理论认为货币升值会抑制出口并增加进口的说法.新台币汇率的变动及结果给人民币汇率的调整提供了借鉴意义.     

The macroeconomic effects of commodity market disruptions in open economies

This paper analyzes the macroeconomic effects of two of the principal causes of the commodity price boom in 1973-74: bad harvests and commodity speculation. The analysis uses a dynamic, fixprice-flexprice model in which exchange rates are flexible and commodities serve as both an asset and a consumption good. Commodity market disruptions of the magnitude that occurred in 1973-74 are shown to have significant effects on prices, exchange rates, trade flows, and capital flows — effects that persist long after the initial shock has passed. Asset markets, defined to include commodity markets, play a central role in transmitting these shocks throughout the world economy.     

Estimation and testing of portfolio Value‐at‐Risk based on L‐comoment matrices

This study employs L‐comoments introduced by Serfling and Xiao (2007) into portfolio Value‐at‐Risk estimation through two models: the Cornish–Fisher expansion (Draper, N. R. & Tierney, D. E., 1973) and modified VaR (Zangari, P., 1996). Backtesting outcomes indicate that modified VaR outperforms and L‐comoments give better estimates of portfolio skewness and excess kurtosis than do classical central moments in modeling heavy‐tailed distributions. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:897–908, 2010