Anticipated foreign military threat, arms accumulation, and the current account in a small open economy

This paper examines the effects of an anticipated foreign military threat on consumption, the home weapons stock, and net foreign asset position in a small open economy. If the utility function is separable between butter and guns, the economy decreases both butter and guns when the news arrives, accumulates foreign assets prior to the foreign threat realization, and increases guns as the foreign threat realizes. If the utility function is nonseparable between butter and guns, the economy may have two dynamic responses. The first is similar to the separable case, except that consumption exhibits a discrete jump when the foreign threat realizes. The second is that the economy increases both butter and guns on impact, decumulates foreign assets prior to the foreign threat implementation, but either increases or decreases guns as the foreign threat realizes.     

Comovements of earnings, dividends, and stock prices

We investigate the comovements of the log of earnings, dividends, and stock prices by testing for the number of common stochastic trends among these series. We find that the three series are cointegrated with a single cointegrating vector. Our findings collectively imply that (i) there is an equilibrium force that tends to keep these series together over time, (ii) changes in dividends are primarily influenced by changes in some measure of permanent earnings, and (iii) a substantial fraction of stock price movement is driven by neither earnings changes nor dividend changes. When we take into account the cointegration relationship, we find that the dynamic relationship between these variables is significantly affected. We present a common stochastic trends model of earnings, dividends, and stock prices, whose implications are broadly consistent with these findings.     

OPTION PRICING AND THE ARBITRAGE PRICING THEORY

This paper applies the arbitrage pricing theory to option pricing. Under certain distribution assumptions or the assumption that there is only one common factor, the underlying asset of an option is the sole risky factor that explains its expected return. Based upon this relationship, a new and simple option-pricing formula is derived, and some important existing option-pricing formulae are reproduced. Empirical results show that the new formula performs as well as the Black-Scholes formula.     

Specification error in multinomial logit models: Analysis of the omitted variable bias

In this article, we analyze the omitted variable bias problem in the multinomial logistic probability model. Sufficient, as well as necessary, conditions under which the omitted variable will not create asymptotically biased coefficient estimates for the included variables are derived. Conditional on the response variable, if the omitted explanatory and the included explanatory variable are independent, the bias will not occur. Bias will occur if the omitted relevant variable is independent with the included explanatory variable. The coefficient of the included variable plays an important role in the direction of the bias.