Employment protection, firm selection, and growth

How do firing costs affect aggregate productivity growth? To address this question, a model of endogenous growth through selection and imitation is developed. It is consistent with recent evidence on firm dynamics and on the importance of reallocation for productivity growth. In the model, growth is driven by selection among heterogeneous incumbent firms and is sustained as entrants imitate the best incumbents. In this framework, firing costs not only induce misallocation of labor, but also affect growth by affecting firms’ exit decisions. Importantly, charging firing costs only to continuing firms raises growth by promoting selection. Also charging them to exiting firms is akin to an exit tax, hampers selection, and reduces growth—by 0.1 percentage points in a calibrated version of the model. With job turnover very similar in the two settings, this implies that the treatment of exiting firms matters for growth. In addition, the impact on growth rates is larger in sectors where firms face larger idiosyncratic shocks, as in services. This fits evidence that recent EU-U.S. growth rate differences are largest in these sectors and implies that firing costs can play a role here.     

Finance and consumption volatility: Evidence from India

The main objective of this paper is to explore the determinants of private consumption growth volatility in India, focusing on the role of financial sector policies. Using data for India over the period 1950-2005, the results show that the implementation of financial repressionist policies is strongly associated with lower consumption volatility. The results remain robust after controlling for a wide range of macroeconomic shocks and variables. The presence of a threshold effect implies that the benefits of financial reforms in reducing consumption volatility can only be reaped when the financial system becomes sufficiently liberalized. The results also indicate that the presence of a more open financial system may serve to dampen fluctuations in private consumption.     

A multivariate nonparametric test for return and volatility timing

This paper develops a novel approach to simultaneously test for market timing in stock index returns and volatility. The tests are based on the estimation of a system of regression equations with indicator variables and provide detailed information about the statistical significance of alternative market timing components.     

Mass at zero in the uncorrelated SABR model and implied volatility asymptotics

We study the mass at the origin in the uncorrelated stochastic alpha, beta, rho stochastic volatility model and derive several tractable expressions, in particular when time becomes small or large. As an application—in fact the original motivation for this paper—we derive small-strike expansions for the implied volatility when the maturity becomes short or large. These formulae, by definition arbitrage free, allow us to quantify the impact of the mass at zero on existing implied volatility approximations, and in particular how correct/erroneous these approximations become.     

The importance of the volatility risk premium for volatility forecasting

In this paper, we study the role of the volatility risk premium for the forecasting performance of implied volatility. We introduce a non-parametric and parsimonious approach to adjust the model-free implied volatility for the volatility risk premium and implement this methodology using more than 20 years of options and futures data on three major energy markets. Using regression models and statistical loss functions, we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models, including its unadjusted counterpart. Our main finding holds for different choices of volatility estimators and competing time-series models, underlying the robustness of our results.     

The anticipated and concurring effects of the EMU: exchange rate volatility, institutions and growth

Reduced exchange rate volatility and higher and less heterogeneous quality of institutional rules and macroeconomic policies are two of the main (anticipated and concurring) effects expected from a currency union.In this paper, we measure the magnitude of these two effects for the Eurozone countries looking at real effective exchange rates (REER) and at different indicators of quality of institutional rules and macroeconomic policies (QIRMP). We find that the first effect is much stronger than the second when we compare relative changes for Eurozone countries and the rest of the world in the relevant period.We further evaluate the impact of both effects on economic growth on a larger sample of countries. Our findings show that both have significant impact on levels (more robust) and on rates of growth (weaker) of per capita GDP.     

关于Shibor利率期权波动率定价机制的研究

Shibor自2007年发布以来,已成为人民币利率市场的一个重要定价基准,对金融衍生品、债券的定价起着十分重要的作用,由于人民币利率衍生品市场尚处于发展的初期,与美元Libor利率期权等较为成熟市场相比,目前Shibor利率期权缺少成熟的市场报价。本文通过风险中性的定价方程反解参数的方法,利用Shibor利率掉期曲线对Shibor利率上下限期权的隐含波动率进行计算,从而探讨对Shibor利率期权的定价。     

What is the correct meaning of implied volatility?

This paper presents a closed-form solution for the valuation of European options under the assumption that the excess returns of an underlying asset follow a diffusion process. In light of our model, the implied volatility computed from the Black–Scholes formula should be viewed as the volatility of excess returns rather than as the volatility of gross returns. Using the SPX and the OMX options data, we test whether implied volatility obtained from Black-Scholes option price explains the volatilities of excess returns better than gross returns, even though the result is not statistically significant.     

Stock market liberalization and operating performance at the firm level

I use firm-specific measures of openness to foreign investors to study the impact of stock market liberalization on firm-level operating performance. In a sample of over 1,100 firms from 28 countries, firms with stocks that are open to foreign investors experience higher growth, greater investment, greater profitability, greater efficiency, and lower leverage. Strategies to address potential endogeneity suggest that the observed relation reflects, at least in part, a causal effect of openness on operating performance.     

The relationship between implied and realized volatility: evidence from the Australian stock index option market

This paper examines the relationship between the volatility implied in option prices and the subsequently realized volatility by using the S&P/ASX 200 index options (XJO) traded on the Australian Stock Exchange (ASX) during a period of 5 years. Unlike stock index options such as the S&P 100 index options in the US market, the S&P/ASX 200 index options are traded infrequently and in low volumes, and have a long maturity cycle. Thus an errors-in-variables problem for measurement of implied volatility is more likely to exist. After accounting for this problem by instrumental variable method, it is found that both call and put implied volatilities are superior to historical volatility in forecasting future realized volatility. Moreover, implied call volatility is nearly an unbiased forecast of future volatility.

Multiperiod hedging in the presence of stochastic volatility

In this paper, we characterize the multiperiod minimum-risk hedge strategy within the stochastic volatility (SV) framework and compare it to other hedge strategies on the basis of hedging performance. Using crude oil markets as an example, we demonstrate that the SV model is appropriate in depicting price behaviour. However, ex ante and ex post comparisons indicate that the SV strategy is inferior to conventional hedging strategies. There is also evidence that the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) strategy may be better than the SV strategy, at least in terms of variance reduction.     

A note on institutional hierarchy and volatility in financial markets

From a statistical point of view, the prevalence of non-Gaussian distributions in financial returns and their volatilities shows that the Central Limit Theorem (CLT) often does not apply in financial markets. In this article, we take the position that the independence assumption of the CLT is violated by herding tendencies among market participants, and investigate whether a generic probabilistic herding model can reproduce non-Gaussian statistics in systems with a large number of agents. It is well known that the presence of a herding mechanism in the model is not sufficient for non-Gaussian properties, which crucially depend on the details of the communication network among agents. The main contribution of this article is to show that certain hierarchical networks, which portray the institutional structure of fund investment, warrant non-Gaussian properties for any system size and even lead to an increase in system-wide volatility. Viewed from this perspective, the mere existence of financial institutions with socially interacting managers contributes considerably to financial volatility.     

Nonparametric prediction for the time-dependent volatility of the security price

In this paper we consider a continuous time model for the security price with the time-dependent volatility. It is shown that the non-normality and non-linear dependency of the short-term return, the major characteristics observed on many financial assets, can be incorporated into our model. In order to evaluate the option price formula on the model we propose a nonparametric predictor for the volatility function without reference to a specific functional form. We examine the so-called continuous record asymptotics and show that the proposed predictor is asymptotically minimax for a wide class of the volatility functions. One of the most important results is that the application of the Black-Scholes method can be justified by plugging the proposed predictor in the standard Black-Scholes formula even if the volatility changes over time.     

The anatomy of growth in the OECD since 1870

Conventional growth accounting exercises are extended in this paper to allow for endogeneity of capital, demographic transitions, age dependency, and employment rates, among other factors. Using data for the OECD countries in the period 1870-2006 it is shown that growth has been predominantly driven by demographics and TFP growth. TFP has, in turn, been driven by R&D, knowledge spillovers through the channel of imports, educational attainment, and the interaction between educational attainment and the distance to the technology frontier. The estimates suggest permanent growth effects of R&D and human capital.     

Information technology,contextual factors and the volatility of firm performance

This study uses previous theory developed in the IT implementation literature and the information processing view of the firm to empirically investigate the impact of IT investments and several contextual variables on the volatility of future earnings. We use InformationWeek 500 data on IT spending from 1992–1997 to find evidence that IT investments increase the volatility of future earnings but that this impact is highly contingent upon three firm level contextual factors — sales growth, unrelated diversification, and size. These factors can lead to conditions in which IT increases or reduces earnings volatility. Taken together, these results may help explain what has recently been termed the “new productivity paradox,” i.e., the apparent under-investment in information technology despite evidence of highly positive returns for doing so, and suggests settings where managers may be under- or over-discounting returns on IT investments.     

A link between complete models with stochastic volatility and ARCH models

In this paper, we propose a heteroskedastic model in discrete time which converges, when the sampling interval goes to zero, towards the complete model with stochastic volatility in continuous time described in Hobson and Rogers (1998). Then, we study its stationarity and moment properties. In particular, we exhibit a specific model which shares many properties with the GARCH(1,1) model, establishing a clear link between the two approaches. We also prove the consistency of the pseudo conditional likelihood maximum estimates for this specific model.Received: December 2002Mathematics Subject Classification: 90A09, 60J60, 62M05JEL Classification: C32This work was supported in part by Dynstoch European network. Thanks to David Hobson for introducing me to these models, and to Valentine Genon-Catalot for numerous and very fruitful discussion on this work. The author is also grateful to Uwe Kuchler for various helpful suggestions, and to two referees and an associate editor for their comments and suggestions.     

Pricing participating policies under the Meixner process and stochastic volatility

We propose a model for the valuation of participating life insurance products under the Meixner process, which belongs to the family of semi-heavy tailed processes. This particular model assumption is extremely desirable as it captures the stylised features of the return distribution, with existing moment generating functions. The highlight of the paper is the analytical solution derived for minimising the relative entropy between the historical and risk-neutral measures, when driving a pricing kernel. Further, we capture the stochastic volatility effect using an accurate polynomial approximation technique. Finally, to highlight the practical applications, we conduct a simulation experiment.     

Capital income taxation and economic growth in open economies

Can reductions in domestic capital income taxes attract foreign capital and, at the same time, foster economic growth? Using a two-country overlapping generations model with endogenous growth and internationally mobile capital, this paper shows that the effect of domestic capital taxes on the international allocation of capital and on the rate of economic growth do not necessarily go in the same direction. A country can attract capital by reducing its taxes, but this may lower the rate of economic growth depending on the elasticity of saving to the net-of-tax interest rate and on the effect of taxes on domestic factor productivity.     

Systematic risk and the theory of the firm: A reexamination

A recent microeconomic model of the determinants of equity betas (Subrahmanyam and Thomadakis 1980) is generalized by including risky human capital in the market portfolio and allowing a general covariance structure between the model's sources of uncertainty. This provides an explanation of the ambiguous effect of operating leverage on beta by viewing human capital and equity contributors as risk sharers in the firm's output risk. This explanation may help to clarify the apparent conflict with the previous literature. The relationship between systematic risk and monopoly power is rederived and shown to depend upon a plausible condition on the correlation between wage rate and price uncertainty. Finally, the public policy implications of this analysis are presented.