On the (nonlinear) relationship between exchange rate uncertainty and trade — An investigation of US trade figures in the group of seven

In this paper bilateral models formalizing monthly growth of US imports and exports are employed to investigate the potential of nonlinear relationships linking exchange rate uncertainty and trade growth. Parametric linear and nonlinear as well as semiparametric time series models are evaluated in terms of fitting and ex ante forecasting. The overall impact of exchange rate variations on trade growth is found to be weak. In periods of large exchange rate variations, trade growth forecasts gain from conditioning on volatility. Empirical results support the view that the relationship of interest might be non-linear and, moreover, lacks homogeneity across countries and imports vs. exports. JEL no. C14, C22, F31, F41     

Interest and reaction time analysis of credit card offers: Managerial implications of high level research procedures

This paper presents a new approach to the optimisation of direct mail offers. Conjoint measurement will be used to identify two aspects of an offer: the degree of interest; and the speed at which an individual processes the information. The approach allows the marketer to create offers that are simultaneously attractive to customers and easy to understand. The approach is illustrated by a credit card case study.     

Optimal design of trade institutions

We model an economy with social institutions that facilitate trade and induce three types of costs: establishment costs, access costs, and use costs. Use costs are specific transaction costs related to the use of these trade institutions. We assume that a trade institution is economically completely determined by the costs it imposes and by the effects on the trades it facilitates. We extend the Pareto efficiency concept to include various modes of organization of social institutions: the costs and benefits of these organizations are expressed in the trades they facilitate.Within this setting we discuss a valuation equilibrium concept, in which all agents use a common conjectural price system that assigns to every trade institution the price vector that would prevail under it. This feature of the equilibrium is important in securing the second welfare theorem, and is new to the analysis of economies with costly trade. Since the use costs can be nonlinear, there are non-convexities that prevent the second welfare theorem from obtaining in a finite economy, but we show it for large economies.Received: 3 April 2002, Accepted: 30 April 2003, JEL Classification: D59, D70, H49Robert P. Gilles: donewhile visiting the Center for Economic Research, Tilburg University, Tilburg, The Netherlands. Financial support from the Netherlands Organization for Scientific Research (NWO), grant B46-390, is gratefully acknowledged.Dimitrios Diamantaras: Part of this research wasSupport from Temple University via a Fuller research fellowship is gratefully acknowledged.The authors would like to thank Suzanne Scotchmer, Andreu Mas-Colell, Marcus Berliant, Shlomo Weber, Hans Haller, Dhanajay Gokhale, Julian Manning, and two anonymous referees for their valuable comments and discussions of previous drafts of this paper. A previous version of this paper was circulated as Equilibria of economies with costly trade.     

An empirical examination of the effectiveness of dollar-cost averaging using downside risk performance measures

Some studies find the dollar-cost averaging investment strategy to be sub-optimal using a traditional Sharpe ratio performance ranking metric. Using both the Sortino ratio and the Upside Potential ratio, we empirically test four investment strategies for alternative asset investments. We find the relative ranking of dollar-cost averaging remains inferior to alternative investment strategies. (JEL G1, G11, N2)     

Job and worker flows in high adjustment cost settings

This paper analyses the relationship between the size of adjustment costs and the intensity of labor market flows. I argue that high adjustment costs inhibit adjustment to temporary shocks, leaving adjustment to long-lived shocks unchanged. Worker turnover is also reduced because of the negative impact that adjustment costs have on churning.Received: January 2002, Accepted: November 2002, JEL Classification: J23, J63I am grateful to the FCT for funding this research (research grant Praxis/PCSH/C/CEG/13/96), and to Pedro Portugal, Daniel Hamermesh and two anonymous referees for helpful comments on earlier versions of this paper. I thank the Department of Statistics at the Ministry of Labor for providing the data. CETE is supported by the FCT.     

Demand for the truth in principal–agent relationships

Consider the following puzzle: If earnings management is harmful to shareholders, why don’t they design contracts that induce managers to reveal the truth? To answer this question, we model the shareholders–manager relationship as a principal–agent game in which the agent (the manager) alone observes the economic outcome. We show that the limited liability (LL) of the agent, defined as the agent’s feasible minimum payment, might explain the demand for earnings management by the principal. Specifically, when the LL level is high (low), a contract that induces earnings management may be less (more) costly than a truth-revealing contract. This finding offers a new explanation of the demand for earnings management.     

Subprime Lenders and Mortgage Market Completion

Without a subprime market, some borrowers by virtue of poor credit history, unstable income, and other characteristics are unable to qualify for a mortgage. With a subprime market, there is a more complete credit supply schedule with the market pricing for poorer credit quality in the mortgage rate. By completing the capital market, subprime lenders reduce borrowing constraints. The result is a social welfare gain. Low-credit applicants otherwise denied funding are able to qualify by paying higher interest rates in exchange for offering more equity or lower loan-to-value ratios. This prediction is consistent with the subprime applicants financing or refinancing their mortgages at relatively low loan-to-value ratios.     

Incentives of Stock Option Based Compensation

We introduce explicitly the effort as a choice variable in a continuous time utility maximisation framework of an executive who is partly compensated with stock options. We solve the model in the case where the executive is not allowed to trade in the company’s stock but is able to achieve a partial insurance through trading in a correlated market portfolio. We define the executive’s value of the options through a certainty equivalence approach both in the case of European call options and non-standard capped stock options and study the behaviour of the reservation price as relevant parameters change.JEL Classification: G13, G30, G32, J33, M12     

Money,Velocity, and the Stock Market

This paper provides a study of the relationship between money growth variability, velocity, and the stock market, using recent advances in financial econometrics. We estimate a trivariate VARMA, GARCH-in-Mean, BEKK model to quantify the effects of financial market and money supply instability. We investigate the robustness of the results to different definitions of money using monthly Divisia indices for the United States from the Center for Financial Stability (CFS). Empirical evidence supports significance of financial market and money supply volatility, and we conclude that Friedman’s money supply volatility hypothesis is alive and well.     

How Can Behavioural Insights Be Used to Improve EU Policy?

The introduction of behavioural insights into policy-making is welcome, because they challenge traditional assumptions in policy-making which are largely inspired by neoclassical economic thinking. In line with good evidence-based policy-making, they make us question and test how people behave instead of assuming we already know the answer.