Stock index dynamics and derivatives pricing with stochastic interest rates

The paper analyzes the equilibrium valuation of stock index derivatives in an economy with stochastic interest rates and with a representative agent having time-additive power utility. The equilibrium short interest rate dynamics and the equilibrium term structure of interest rates are described by an affine one-factor term structure model. In equilibrium the value of the stock index is a non-trivial function of the short interest rate. The paper investigates the consequences of the induced stock index dynamics for the theoretical spreads between index forward prices and index futures prices and the consequences for the valuation of options on stock index futures.The paper was written while the author was a visiting scholar at Department of Finance, Kellogg Graduate School of Management, Northwestern University. I thank for helpful comments and suggestions from Gurdip Bakshi, Avi Bick, Menachem Brenner (the editor), Zhiwu Chen, San-Lin Chung, Mark Fisher, Andreas Höger, Marti Subrahmanyam, two anonymous referees, and participants at the Western Finance Association meeting in San Diego, the European Financial Management Association meeting in Istanbul, the European Finance Association meeting in Vienna, and the Center of Analytical Finance workshop at University of Aarhus. Financial support from the Danish Natural Science and Social Science Reasearch Councils is gratefully acknowledged.     

The path dependence of organizational reputation: how social judgment influences assessments of capability and character

Drawing upon theory on social judgments and impression formation from social psychology, this paper explores the socio‐cognitive processes that shape the formation of favorable and unfavorable organizational reputations. Specifically, we suggest that stakeholders make distinctions between an organization's capabilities and its character. We explain the nature and function of each and articulate the manner in which judgment heuristics and biases manifest in the development of capability and character reputations. In doing so, this research explores both the positive and negative sides of organizational reputation by examining the manner in which different types of reputations are built or damaged, and how these processes influence the ability of managers to enhance and protect these reputations. Copyright © 2011 John Wiley & Sons, Ltd.     

What drives idiosyncratic volatility over time?

We document the patterns of market-wide and firm-specific volatility in the Portuguese stock market over the 1991–2005 period and test several explanations for the behavior of firm-level idiosyncratic volatility. Unlike previous studies we find no evidence of a statistically significant rise in firm-specific volatility. On the contrary, the ratio of firm-specific risk to total risk slightly decreases. We show that this result stems from new listings of large privatized companies that display lower firm-specific risk. Our findings are consistent with the idea that changes in idiosyncratic volatility are related to changes in the composition of the market.

Environmental quality indicators: Background,principles and examples from Norway

The need for a simple and general overview of the development in the state of the environment has led to work on environmental indicators in several countries and international organizations. Except for the basic common requirement of providing an overview, the works vary a great deal with regard to final aim, target groups, classification and, hence, choice of indicators. This paper gives an overview of the work carried out in the Central Bureau of Statistics of Norway within this field, with emphasis on the basic principles behind the choice of indicators. A hierarchical system of indicator sets is proposed, and examples of indicators are presented. Also, a brief overview of work carried out elsewhere is included.     

Trade liberalization, foreign ownership, and the environment in a small open economy

This paper examines the effects of trade liberalization on firm ownership and the environment for a small open economy. It is found that trade liberalization via tariff reductions can result in a dramatic switch in firm ownership from domestic to foreign, coupled with a lower pollution tax.     

Import quotas, tied aid, capital accumulation, and welfare

Aid conditional on the purchase of an imported capital good increases the supply of, and demand for, the good. Examining the effects of tied aid on capital accumulation, the current account, and welfare, we find that two resultant conflicting forces render the price of the capital good indeterminate. If the demand pressure is larger than the supply response, the capital stock increases at the expense of the current account and welfare improves. Alternatively, if the demand pressure is less than the supply response, capital is reduced. This may be detrimental to welfare. JEL Classification: F35, F11
Contingentement à l'importation, aide liée, accumulation et bien-être. Une aide conditionnelle accordée pour l'achat d'un bien importé accroît l'offre et la demande de ce bien. En examinant les effets d'une aide liée de ce type sur l'accumulation du capital, le compte courant et le niveau de bien-être, les auteurs montrent que deux forces contradictoires rendent le prix du bien capital indéterminé. Si la pression sur la demande est plus grande que la réponse du côté de l'offfre, le stock de capital s'accroît au détriment du compte courant, et le niveau de bien-être s'accroît. D'autre part, si la pression en provenance de la demande est moindre que la réponse du côté de l'offre, le stock de capital est réduit. Cela peut entraîner une réduction du niveau de bien-être.     

Political activism and polarization

I develop a model of activism and polarization in the context of electoral competition. Two candidates simultaneously announce policy platforms and seek the support of ideologically inclined activists. Activists compete to influence electoral outcomes by expending costly support for their respective candidates. The presence of activists always moderates the platform choice of candidates, compared to the case of no activism. The central finding of the paper is that the relationship between partisanship of activists and polarization is ambiguous. As activists become increasingly partisan, polarization of candidate platforms reduces or widens depending on the costs of activism. I present normative conditions under which the presence of activism and increased partisanship among activists are both welfare‐improving for voters. Finally, introducing a public funding option for candidates increases polarization in the political process.     

Learning and the central bank

It is well known that sunspot equilibria may arise under an interest rate operating procedure in which the central bank varies the nominal rate with movements in future inflation (a forward-looking Taylor rule). This paper demonstrates that these sunspot equilibria may be learnable in the sense of E-stability.     

Identification and Measurement of Australian Consumer Sentiment

This article was prepared by Dr L. V. Defris and J. S. McDonnell of the Institute research staff. The authors wish to thank Professor R. F. Henderson and Dr P. J. Sheehan for their helpful comments.