Asset price bubbles from heterogeneous beliefs about mean reversion rates

Harrison and Kreps showed in 1978 how the heterogeneity of investor beliefs can drive speculation, leading the price of an asset to exceed its intrinsic value. By focusing on an extremely simple market model—a finite-state Markov chain—the analysis of Harrison and Kreps achieved great clarity but limited realism. Here we achieve similar clarity with greater realism, by considering an asset whose dividend rate is a mean-reverting stochastic process. Our investors agree on the volatility, but have different beliefs about the mean reversion rate. We determine the minimum equilibrium price explicitly; in addition, we characterize it as the unique classical solution of a certain linear differential equation. Our example shows, in a simple and transparent manner, how heterogeneous beliefs about the mean reversion rate can lead to everlasting speculation and a permanent “price bubble.”     

A note on an alternative derivation of the likelihood of an autoregressive moving average process

We give an alternative derivation of the likelihood of a Gaussian ARMA process to that usually given in the literature [see, for example, Newbold (1974), Hillmer and Tiao (1979), and Nicholls and Hall (1979,1980)]. A different computing formula is also derived.     

Optimal Volume of Environmentally Damaging Trade

It is controversial whether international trade enhances or degrades the global environment. In this model, environmental quality, as measured by biodiversity, is damaged by the consequences of trade, which include the commercialization of natural habitat, pollution and bioinvasion. However, there are also benefits of trade. When both countries internalize the external costs of production and trade, measures of environmental quality may be higher or lower as a consequence of trade, but there is always, unambiguously, less trade the more environmentally damaging it is.     

A heckscher-ohlin-samuelson interpretation of the labor-environmental coalition in Seattle

The coalition of North American labor unions and environmental organizations that joined in Seattle in 1999 is examined in the context of a Heckscher-Ohlin-Samuelson simulation in which a labor abundant developing country, with a comparative advantage in a globally polluting industry but a weak environmental policy, endeavors to export some of the output of that industry to a capital abundant industrialized country but is thwarted by a trade sanction that requires it to adopt the strong environmental policy of the industrialized country as a precondition for trade. Labor unions in the industrialized country and environmental organizations both gain when the developing country complies with the sanctions but lose out when the World Trade Organization overrules the sanctions as barriers to free trade.     

Mediating touristic dangerscapes: the semiotics of state travel warnings issued to Israeli tourists

Official ‘travel warnings’ are recurrently published by the Counter-Terrorism Bureau in Israeli media, with the aim of informing potential tourists about the dangers of terrorism aimed at Israelis who travel abroad. These travel warnings, which juxtapose menacing warnings with tranquil visual representations of touristic vacationscapes, have recently gained a considerable public attention and have sprouted discussions around local tourism and identities. In this article, we offer a discursive and semiotic analysis of 55 travel warning articles, which appeared between 1998 and 2010 in printed and digital Hebrew press in Israel. We address visual and textual aspects of the articles and ask how they represent and mediate touristic vacationscapes. Following recent developments (‘turns’) in both tourism studies and media studies, we argue that these warnings articles construct multilayered spatial–visual representations of tourist destinations, which amount to a unique genre of tourism imagery in and of itself. Focussing on travel warnings addressing Israeli tourists who travel to the Eastern shores of the Egyptian Sinai Peninsula, we find that these combined or hybrid images and spaces present a convergence of two contemporary systems of representation, related to tourism and mass media, respectively, and construct a charged and mediated cultural space in Israeli collective imagination.     

On the equivalence of the static and dynamic asset allocation problems

A classic dynamic asset allocation problem optimizes the expected final-time utility of wealth, for an individual who can invest in a risky stock and a risk-free bond, trading continuously in time. Recently, several authors considered the corresponding static asset allocation problem in which the individual cannot trade but can invest in options as well as the underlying. The optimal static strategy can never do better than the optimal dynamic one. Surprisingly, however, for some market models the two approaches are equivalent. When this happens the static strategy is clearly preferable, since it avoids any impact of market frictions. This paper examines the question: when, exactly, are the static and dynamic approaches equivalent? We give an easily tested necessary and sufficient condition, and many non-trivial examples. Our analysis assumes that the stock follows a scalar diffusion process, and uses the completeness of the resulting market model. A simple special case is when the drift and volatility depend only on time; then the two approaches are equivalent precisely if (μ (t)? r)/σ²(t) is constant. This is not the Sharpe ratio or the market price of risk, but rather a nondimensional ratio of excess return to squared volatility that arises naturally in portfolio optimization problems.