Polynomial approximations in cross-sectional models

The time-series distributed lag techniques of econometrics can be usefully applied to cross-sectional, spatial and cross-section time-series situations. The application is perfectly natural in cross-section, time-series models when regression coefficients evolve systematically as the cross-section grouping variable changes. The evolution of such coefficients lends itself to polynomial approximation or more general smoothing restrictions. These ideas are not new, Gersovitz and McKinnon (1978) and Trivedi and Lee (1981) providing two of the earliest applications of cross-equation smoothing techniques. However, their applications were in the context of coefficient variation due to seasonal changes and this may account for the non-diffusion of these techniques. The approach here is illustrated in the context of age-specific household formation equations based on census data, using Almon polynomials when the regression coefficients vary systematically by age group. A second application is provided, using spatial data, explaining the incidence of crime, by region; using polynomial and geometric smoothing to model distance declining regional effects.     

From edgeworth to fisher to vickrey: A comment on Michael J. Boskin's Vickrey lecture

Irving Fisher has been overlooked as an influence on William Vickrey's work on taxation and as a link between Edgeworth and Vickrey. Vickrey was Fisher's last and greatest student.     

A Study of Arbitrage Efficiency Between the FTSE‐100 Index Futures and Options Contracts

Despite the importance of the London markets and the significance of the relationship for market makers, little published research is available on arbitrage between the FTSE‐100 Index futures and the FTSE‐100 European index options contracts. This study uses the put–call–futures parity condition to throw light on the relationship between options and futures written against the FTSE Index. The arbitrage methodology adopted in this study avoids many of the problems that have affected prior research on the relationship between options or futures prices and the underlying index. The problems that arise from nonsynchroneity between options and futures prices are reduced by the matching of options and futures prices within narrow time intervals with time‐stamped transaction data. This study allows for realistic trading and market‐impact costs. The feasibility of strategies such as execute‐and‐hold and early unwinding is examined with both ex‐post and ex‐ante simulation tests that take into consideration possible execution time lags for the arbitrage trade. This study reveals that the occurrence of matched put–call–futures trios exhibits a U‐shaped intraday pattern with a concentration at both open and close, although the magnitude of observed mispricings has no discernible intraday pattern. Ex‐post arbitrage profits for traders facing transaction costs are concentrated in at‐the‐money options. As in other major markets, despite important microstructure differences, opportunities are generally rapidly extinguished in less than 3 min. The results suggest that arbitrage opportunities for traders facing transaction costs are small in number and confirm the efficiency of trading on the London International Financial Futures and Options Exchange. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:31–58, 2002     

Exchange Rate Pass‐through and Currency Invoicing: Implications for Monetary Integration in East Asia

Exporter's price‐setting behaviour and currency invoicing play a key role in the literature on the new open‐economy macroeconomics. This paper estimates exchange rate pass‐through coefficients for the exports of four ASEAN countries: Indonesia, Malaysia, the Philippines and Thailand. In addition, previous estimates of pass‐through as well as invoicing behaviour in East Asia are discussed in the context of regional integration. The new pass‐through coefficients are estimated under two alternate specifications for up to 34 goods for each of the four ASEAN countries destined for up to 13 major markets. The results suggest: (a) little pass‐through is occurring in Southeast Asia and (b) this lack of pass‐through is more likely attributable to the fact that they are small countries in a relatively integrated market, rather than evidence of pricing to market. The implications for regional monetary integration of this apparently low degree of pass‐through are detailed.     

The composition of interest: The judaic prohibition

An interest charge is made up of an award for waiting known as the real rate of interest, a premium for risk and compensation for transaction costs. Where inflation exists the lender seeks further compensation. In order to understand the composition and evolution of different versions of the usury prohibition it is necessary to ask which components of an interest charge are prohibited by each version. The Judaic prohibition has two aspects which are of particular interest to business historians and students of usury. First, the general rule is that a reward for waiting is prohibited. This focuses on the time-based part of interest charge. Second, interest is prohibited because it amounts to placing a stumbling block before the blind. This focuses on the typical gullibility of the borrower confronted by a more expert, better funded lender. Economics confirms and enriches our understanding of these important aspects of the prohibition. They achieve this by increasing our understanding of two facts: first, that the borrower is a gullible individual subject to irrational and inconsistent behaviour; and, second, that this behaviour relates to the waiting aspect of interest which is proscribed in the prohibition. How far these insights apply to other civilisations' prohibition, particularly those which derive from the Judaic prohibition, merits further study; so also do the ethical lessons of the Mosaic rules for a globalised society based on capitalism.     

The baby boom, the baby bust, and the housing market A second look

I re-examine Mankiw-Weil's (MW) claim that house prices will fall 47% by 2007. MW argue that the arrival of the Baby Boom generation at adulthood drove up prices during the 1970s. When the beginnings of the Baby Bust generation matured in the 1980s, prices softened. When this generation arrives in earnest, prices will collapse. I make three points: (1) The regression upon which MW hang their prediction has an implausible -8.1% trend, which drives their prediction. (2) Demand directly influences the rental price; the asset price (MW's variable) is influenced by demand only indirectly. I re-run MW's regression, replacing the asset price with the rental price, and their prediction disappears. (3) Relying on data presented by MW, I show that housing consumption rose during the 1970s, after adjusting for income growth. Just when MW say the asset price of housing was rising, consumers behaved as if the price were falling. Consumers were right: The rental price fell by approximately 20% during the 1970s.     

A comparison of several approximations to the power function of the likelihood ratio test in covariance structure analysis*

In this paper we compare alternative asymptotic approximations to the power of the likelihood ratio test used in covariance structure analysis for testing the fit of a model. Alternative expressions for the noncentrality parameter (ncp) lead to different approximations to the power function. It appears that for alternative covariance matrices close to the null hypothesis, the alternative ncp's lead to similar values, while for alternative covariance matrices far from H_o the different expressions for the ncp can conflict substantively. Monte Carlo evidence shows that the ncp proposed in Satorra and Saris (1985) gives the most accurate power approximations.     

Corporate Leverage and Nondebt Tax Shields: Evidence on Crowding-Out

A negative relationship between corporate leverage and tax shields has been predicted because a large nondebt tax shield reduces the expected value of interest tax savings and lessens the advantage of debt financing. Previous studies, however, have provided inconclusive and contradictory evidence on whether nondebt tax shields crowd-out debt financing. The analysis herein relies on unique constructs of discounted depreciation tax shields and presents evidence that crowding-out does not occur. Furthermore, it is shown that contradictory inferences may result from analysis of annual tax depreciation deductions instead of discounted tax shields. The findings suggest that firms with substantial cash flow from depreciation exploit their higher debt capacity by maintaining a capital structure with significantly more debt than otherwise.     

An interview with Rhonda Anderson. Interview by Connie R. Curran

Nurse executives working in a hospital system experience varied and challenging opportunities to enhance the quality of patient care as well as the success of their professional careers. In this interview, Rhonda Anderson, MPA, RN, CNAA, discusses the hospital system, the managed care environment, and the importance of developing nurse managers.