The European Union's Balkan development policy

After more than a decade of cooperation between the European Union and the formerly socialist Balkan countries, the latter—in stark contrast to a number of other ex-socialist countries—are characterised by severe transition problems, poor economic conditions, political instability and proneness to military conflict. Against this background, our author evaluates the EU's past and present Balkan development policies, concluding with some suggestions towards a new strategy of cooperation.     

Mean and Variance Causality between Official and Parallel Currency Markets: Evidence from Four Latin American Countries

This paper examines the issue of mean and variance causality across four Latin American official and black markets for foreign currency using monthly data for the period 1976–1993. We apply a recent test developed by Cheung and Ng (1996) in order to test for mean and variance spillovers. The main findings are: (1) In contrast to the findings of previous studies, EGARCH-M processes characterize each bilateral exchange rate series in both markets; (2) There is substantial evidence of causality in both mean and variance with the causality in mean largely being driven by the causality in variance; and (3) The results indicate that the major exporter of causality is the Mexican black market with the black market of Argentina and the black and official markets of Brazil being the smallest contributors.     

The square-root process and Asian options

Although the square-root process has long been used as an alternative to the Black–Scholes geometric Brownian motion model for option valuation, the pricing of Asian options on this diffusion model has never been studied analytically. However, the additivity property of the square-root process makes it a very suitable model for the analysis of Asian options. In this paper, we develop explicit prices for digital and regular Asian options. We also obtain distributional results concerning the square-root process and its average over time, including analytic formulae for their joint density and moments. We also show that the distribution is actually determined by those moments.     

Financial development and household portfolios – Evidence from Spain,the U.K. and the U.S.

We examine the impact of financial development on the composition of household portfolios in Spain, the U.K. and the U.S., three countries whose financial systems underwent profound changes over the past two decades and for which relevant data exist for sufficiently long time periods. We find a ‘division of labour’ between the indices measuring financial development and asset returns, the first affecting mainly the long-run dynamics of household portfolios and the second the short-run dynamics; both, however, in an economically reasonable way. Among the notable results pertaining to long-run dynamics, more competitive financial intermediaries are associated with a higher share of currency and deposits and a lower share of equity. For the short-run dynamics, the most important driver is stock market returns.     

AN ANALYTICAL SOLUTION FOR THE TWO‐SIDED PARISIAN STOPPING TIME,ITS ASYMPTOTICS,AND THE PRICING OF PARISIAN OPTIONS

In this paper, we obtain a recursive formula for the density of the two‐sided Parisian stopping time. This formula does not require any numerical inversion of Laplace transforms, and is similar to the formula obtained for the one‐sided Parisian stopping time derived in Dassios and Lim. However, when we study the tails of the two distributions, we find that the two‐sided stopping time has an exponential tail, while the one‐sided stopping time has a heavier tail. We derive an asymptotic result for the tail of the two‐sided stopping time distribution and propose an alternative method of approximating the price of the two‐sided Parisian option.     

Lead-lag effects in the mean and variance of returns of size-sorted UK equity portfolios

We test for lead-lag effects in the mean and variance among size-sorted portfolios for the UK stock market. We construct three sets of portfolios, namely a set of size-sorted equally-weighted portfolios of different capitalization size, a set of size-sorted value-weighted portfolios of different capitalization size, and a third set of portfolios of the same capitalization size. The recently proposed Cross Correlation Function test is employed. For both sets of portfolios with different capitalization size, we find evidence of a lead effect in both the mean and the variance from large-firm portfolios to small-firm portfolios. This result does not depend on the weighting scheme used to construct portfolios, and indicates that contrarian trading strategies on large-firm portfolios are profitable. For portfolios of equal capitalization size, there is hardly any evidence of a lead-lag effect in either the mean or the variance. This suggests that the lead-lag effect is due to the difference in the capitalization size among portfolios.I wish to thank two anonymous referees for helpful comments on a previous draft of this paper. The usual disclaimer applies.ing scheme.First version received: February 2002/Final version received: May 2003     

Consumer credit and consumption forecasts

Recent advances in the theory of consumer behavior indicate that consumption may exhibit non-linear dynamics characterized by occasional surges. Building upon them, and taking explicitly into account the forward-looking nature of consumption, this paper argues that rising consumer debt can signal such surges, as well as the consumption underprediction which will occur if they are not taken sufficiently into account in forecasting. This insight is tested with and strongly confirmed by the Organization of Economic Cooperation and Developments forecasts for the USA. The results should be of interest not only to professional forecasters and policy-makers, but also to theoretical economists and econometricians who study non-linear dynamic models.