Jump-Diffusion Processes: Volatility Smile Fitting and Numerical Methods for Option Pricing

This paper discusses extensions of the implied diffusion approach of Dupire (1994) to asset processes with Poisson jumps. We show that this extension yields important model improvements, particularly in the dynamics of the implied volatility surface. The paper derives a forward PIDE (PartialIntegro-Differential Equation) and demonstrates how this equationcan be used to fit the model to European option prices. For numerical pricing of general contingent claims, we develop an ADI finite difference method that is shown to be unconditionally stable and, if combined with Fast Fourier Transform methods, computationally efficient. The paper contains several detailed examples fromthe S&P500 market. This revised version was published online in November 2006 with corrections to the Cover Date.     

Impacts of the Productive Safety Net Program in Ethiopia on livestock and tree holdings of rural households

We evaluated the impacts of the Ethiopian Productive Safety Net Program (PSNP) on rural households' holdings of livestock and forest assets/trees. We found no indication that participation in PSNP induces households to disinvest in livestock or trees. In fact, households that participated in the program increased the number of trees planted, but there was no increase in their livestock holdings. We found no strong evidence that the PSNP protects livestock in times of shock. Shocks appear to lead households to disinvest in livestock, but not in trees. Our results suggest that there is increased forestry activity as a result of PSNP, and that improved credit access encourages households to increase their livestock holdings.     

Investment liberalisation and firm selection process: A welfare analysis from a host-country perspective

We set up a theoretical model to analyze the implications of coordination of immigration policies among destination countries. The model contains two types of spillovers between destination countries: a terms-of-trade externality and a welfare-policy externality. We show that while coordination unambiguously increases welfare of the destination countries, the effects on the level of immigration and on the income distribution of natives are ambiguous. Thus, coordination among destination countries does not necessarily solve the global coordination problem of inoptimally low levels of migration.     

A role for a pan-European trade union movement?–possibilities in European IR-regulation

Steps towards internationalisation of the trade union movement are considered in the context of the process of political and economic integration taking place in the EU. The trade unions are trying–partly via the ETUC–to play a role at pan-European level. However, the European trade union movement is not a cohesive entity. Besides, it has no significant transnational power-resources. These factors suggest that any European IR-system will be based primarily on political regulation rather than on a system of collective agreements.     

Aspects of second‐order analysis of structured inhomogeneous spatio‐temporal point processes

Statistical methodology for spatio‐temporal point processes is in its infancy. We consider second‐order analysis based on pair correlation functions and K‐functions for general inhomogeneous spatio‐temporal point processes and for inhomogeneous spatio‐temporal Cox processes. Assuming spatio‐temporal separability of the intensity function, we clarify different meanings of second‐order spatio‐temporal separability. One is second‐order spatio‐temporal independence and relates to log‐Gaussian Cox processes with an additive covariance structure of the underlying spatio‐temporal Gaussian process. Another concerns shot‐noise Cox processes with a separable spatio‐temporal covariance density. We propose diagnostic procedures for checking hypotheses of second‐order spatio‐temporal separability, which we apply on simulated and real data.     

Administrative and Survey Data in Personnel Economics

The number of empirical studies in personnel economics using administrative data has grown rapidly in recent years. We survey the use of administrative data to examine employment contracts. Specifically, we consider three types of data that have been widely used in empirical studies: historical firm‐level records, contemporary firm‐level records and national matched employer–employee records. Studies using this sort of administrative data have shed considerable light on the nature of employment relationships.     

Real-time effects of central bank intervention in the euro market

This paper investigates the real-time effects of sterilized foreign exchange intervention using official intraday intervention data provided by the Danish central bank. Our analysis employs a two-step weighted least squares estimation procedure. We control for macro surprises, address the issue of endogeneity, and carry out an array of robustness tests. Only when the direction of intervention is consistent with the monetary policy stance do we find that intervention exerts a significant influence on exchange rate returns.     

Are momentum crashes pervasive regardless of strategy? Evidence from the foreign exchange market

This article studies the option-like behaviour of popular momentum strategies implemented in foreign exchange markets. The results confirm recent research findings of strong option-like behaviour for momenutm measures, based on the cumulative return from 12 and 6 months prior to the formation date Surprisingly, there is no such evidence for the popular momentum strategy accounting for a 1-month formation period.     

A mixed C-vine copula model for hedging price and volumetric risk in wind power trading

When energy trading companies enter into long-term agreements with wind power producers, where a fixed price is paid for the fluctuating production, they are facing a joint price and volumetric risk. Since the pay-off of such agreements is non-linear, a hedging portfolio would ideally consist of not only forwards, but also a basket of e.g. call and put options. Illiquidity and an almost non-existent market for options challenge however the optimal hedging of joint price and volumetric risk in many market places. Here, we consider the case of the Danish power market, and exploit its strong positive correlation with the much more liquid German market to construct a proxy hedge. We propose a three-dimensional mixed vine copula to model the evolution of the Danish and German spot electricity prices and the Danish wind power production. We construct a realistic hedging portfolio by identifying various instruments available in the market, such as real options in the form of the right to transfer electricity across the border and the right to convert electricity to heat. Using the proposed vine copula to determine optimal hedging decisions, we show that significant benefits are to be drawn by extending the hedging portfolio with the proposed instruments.