Switching between Expectation Processes in the Foreign Exchange Market: a Probabilistic Approach using Survey Data*

This paper relaxes a fundamental hypothesis commonly accepted in the expectation formation literature: expectations are, unchangingly, either rational or generated by one of the three simple extrapolative, regressive, or adaptive processes. Using expectations survey data provided by Consensus Forecasts on six European exchange rates against the US dollar, we find that the rational expectations hypothesis is rejected at the aggregate level. By implementing a switching‐regression methodology with stochastic choice of regime, we show that the expectation generating process is given at any time by some combination of the three simple processes. An interpretation of this framework in terms of economically rational expectations is suggested.     

Nash implementing social choice rules with restricted ranges

We consider Nash implementation of social choice rules with restricted ranges, i.e., where some of the available alternatives are chosen at no preference profile. We show that the appropriate adaptation of Maskin monotonicity to this context depends on the range of the mechanisms: the wider is this range, the weaker is the monotonicity condition to be used. As a result, mechanisms employing outcome functions which allow for out-of-range alternatives at off-equilibrium messages can Nash implement social choice rules which fail to be Nash implementable by mechanisms whose ranges are restricted to the range of the social choice rule to be implemented. The Walrasian social choice correspondence is a particular instance of this. Moreover, social choice rules which are not Maskin monotonic can be “monotonized” by the addition of artificial out-of-range alternatives—a point we illustrate through Solomon’s Dilemma.     

Strategy-proofness of the plurality rule over restricted domains

We give a complete characterization of preference domains over which the plurality rule is strategy-proof. In case strategy-proofness is required to hold under all tie-breaking rules, strategy-proof domains coincide with top-trivial ones where the range of the plurality rule admits at most two alternatives. This impossibility virtually prevails when strategy-proofness is weakened so as to hold under at least one tie-breaking rule: unless there are less than five voters, the top-triviality of a domain is equivalent to the (weak) non-manipulability of the plurality rule. We also characterize the cases with two, three or four voters. I am grateful to Attila Tasnadi for his thorough reading of the paper and pointing to an error in an earlier version. I thank Levent Kutlu, Clemens Puppe, Arunava Sen, an anonymous referee and an anonymous AE for their comments. This research is part of the project “Social Perception—A Social Choice Perspective” supported by Istanbul Bilgi University Research Fund. I also acknowledge the support of the Turkish Academy of Sciences Distinguished Young Scientist Award Program (TUBA-GEBIP).     

Persistence of announcement effects on the intraday volatility of stock returns: Evidence from individual data

We analyze the persistence effects in the empirical relationship between announcement releases and return volatilities of four major companies of the French stock market using high frequency data over the period 1995–1999. Besides its institutional stability, this sample period avoids the econometric difficulties inherent to simultaneous news arrivals. Our approach contributes to the relevant literature in that we focus on individual stock volatilities rather than indices, we distinguish firm‐specific and macroeconomic announcements, and we endogenize both the durations of announcement effects and the response patterns of equity prices. We find that our individual volatilities are affected by a systematic market effect, calendar effects, announcements related to the firms’ macroeconomic environment and announcements related to the firms’ and their competitors’ strategic dealings and commercial outcomes. We find evidence that all volatility responses are gradual with persistence horizons ranging from one to three hours, revealing a significant degree of inefficiency of the French stock market over the period. This inefficiency can be viewed as a breeding ground for the implementation of more performant informational and trading systems that allowed markets to move towards more efficiency.     

Nash implementing non-monotonic social choice rules by awards

Summary. By a slight generalization of the definition of implementation (called implementation by awards), Maskin monotonicity is no more needed for Nash implementation. In fact, a weaker condition, to which we refer as almost monotonicity is both necessary and sufficient for social choice correspondences to be Nash implementable by awards. Hence our framework paves the way to the Nash implementation of social choice rules which otherwise fail to be Nash implementable. In particular, the Pareto social choice rule, the majority rule and the strong core are almost monotonic (hence Nash implementable by awards) while they are not Maskin monotonic (hence fail to be Nash implementable in the standard framework).Received: 12 April 2004, Revised: 18 March 2005, JEL Classification Numbers: D 79.I thank François Maniquet, Efe Ok and Ipek Ozkal-Sanver for their valuable contributions. The paper is part of a project on Electoral System Design supported by Bilgi University Research Fund.     

Well-designed incentive schemes: introduction to the special issue in honor of Semih Koray

Review of Economic Design -     

Compromising as an equal loss principle

Review of Economic Design - A social choice rule aggregates the preferences of a group of individuals over a set of alternatives into a collective choice. The literature admits several social...