Discrete-time bond and option pricing for jump-diffusion processes

This paper provides a methodology for numerically pricing generalized interest rate contingent claims for jump-diffusion processes. The method enhances the standard finite-differencing approach to deal with partial differential-difference equations derived in a jump-diffusion setting. Numerical illustrations compare jump-diffusion and pure-diffusion models.I am especially grateful to Darrell Duffie, who provided me immensely valuable input on the paper. I would also like to thank Dilip Madan and Rangarajan Sundaram for alleviating my confusion with helpful comments.     

Temporary shocks and offshoring: The role of external economies and firm heterogeneity

We construct a model of offshoring with externalities and firm heterogeneity. Due to the presence of externalities, temporary shocks like the Y2K problem can have permanent effects, i.e., they can permanently raise the extent of offshoring in an industry. Also, the initial advantage of a country as a potential host for outsourcing activities can create a lock in effect, whereby late movers have a comparative disadvantage. Furthermore, the existence of firm heterogeneity along with externalities can help explain the dynamic process of offshoring, where the most productive firms offshore first and the others follow later. Finally, we work out some unexpected welfare implications which show that net industry profits can be lower in an outsourcing equilibrium than in a regime of no outsourcing. Consumer welfare rises, and under fairly plausible conditions this effect can offset the negative impact on profits.     

Development policies in the presence of an informal sector: A note

We consider the model of Grinols (1991) which introduces an urban informal sector with a specific capital in an otherwise mobile capital Harris-Todaro model. In this paper, we analyze the welfare effect of various policies in the model of Grinols and compare the results with those obtained from the model of Corden and Findlay (1975).     

FDI, services trade and economic growth in India: empirical evidence on causal links

This article examines the linkages between inward FDI, services trade (export and import) and economic output using co-integration and VECM causality test. These linkages have been explored both at the aggregate and at the sectoral levels (manufacturing and services). The empirical findings confirm the long-run relationship among these variables. Causality results indicate the presence of bi-directional causal relationship between FDI and economic output as well as between services exports and economic output. The results also bring out feedback relationship between services export and FDI, reconfirming the presence of complementary relationship between the two. At the sectoral level, we find at least a unidirectional causality from FDI and services exports to both manufacturing and services output and also cross-sectoral spillover effects from manufacturing output to services output and vice versa.     

The environmental Kuznets curve when the environment exhibits hysteresis

The relevance and implications of the environmental Kuznets hypothesis are examined in the presence of stock effects and non-linearities associated with pollution generation. Stock effects lead to hysteresis and irreversibilities in environmental quality that are overlooked when emphasis is placed on the flow effects of pollutants only. It is demonstrated here that an optimal growth plan in the presence of stock effects shifts the focus away from prescribing economic growth as a panacea for environmental ills. Implications for currently industrializing economies are discussed.     

Fee Speech: Signaling, Risk-Sharing, and the Impact of Fee Structures on Investor Welfare

The fee structure used to compensate investment advisers iscentral to the study of fund design, and affects investor welfarein at least three ways: (i) by influencing the portfolio-selectionincentives of the adviser, (ii) by affecting risk-sharing betweenadviser and investor, and (iii) through its use as a signalof quality by superior investment advisers. In this paper, wedescribe a model in which all of these features are present,and use it to compare two popular and contrasting forms of feecontracts, the "fulcrum " and the "incentive " types, from thestandpoint of investor welfare. While the former has some undeniablyattractive features (that have, in particular, been used byregulators to justify its mandatory use in a mutual fund context),we find surprisingly that it is the latter that is often moreattractive from the standpoint of investor welfare. Our modelis a flexible one; our conclusions are shown to be robust tomany extensions of interest. The results are also extended toconsider unrestricted fee structures and competitive marketsfor fund managers.     

A non-separable generalisation of the linear expenditure system allowing non-linear Engel curves

This paper proposes and estimates a new generalisation of the LES that allows for both non-linear Engel curves and non-separable preferences. The empirical results decisively reject linear Engel curves on pooled cross section data and separable preferences on pure time series data.     

Child Labour and Trade Liberalization

The paper analyses the implications of trade liberalization on the incidence of child labour in a two-sector general equilibrium framework. The supply function of child labour has been derived from the utility-maximizing behaviour of the working families. The paper finds that the effect of trade liberalization on the incidence of child labour crucially hinges on the relative factor intensities of the two sectors.     

An approximation algorithm for optimal consumption/investment problems

This article develops a simple approach to solving continuous-time portfolio choice problems. Portfolio problems for which no closed-form solutions are available may be handled by this technique, which substitutes the numerical solution of partial differential equations with a non-linear numerical algorithm approximating the solution. This paper complements the wide literature in economics on the solution of dynamic problems in discrete time using projection methods. Our approach extends the approximation function to power forms, which are shown to fit finance type problems well. The algorithm is parsimonious, and is first illustrated by solving two basic examples, first, the standard Merton problem, and second, a jump-diffusion problem. Then, we demonstrate that the model is easy to implement on a larger scale, by optimizing a portfolio of six stock indexes, and stochastic volatility driven by two correlated state variables. Copyright © 2002 John Wiley & Sons, Ltd.