QUADRATIC TERM STRUCTURE MODELS FOR RISK-FREE AND DEFAULTABLE RATES

In this paper, quadratic term structure models (QTSMs) are analyzed and characterized in a general Markovian setting. The primary motivation for this work is to find a useful extension of the traditional QTSM, which is based on an Ornstein–Uhlenbeck (OU) state process, while maintaining the analytical tractability of the model. To accomplish this, the class of quadratic processes, consisting of those Markov state processes that yield QTSM, is introduced. The main result states that OU processes are the only conservative quadratic processes. In general, however, a quadratic potential can be added to allow QTSMs to model default risk. It is further shown that the exponent functions that are inherent in the definition of the quadratic property can be determined by a system of Riccati equations with a unique admissible parameter set. The implications of these results for modeling the term structure of risk-free and defaultable rates are discussed.     

The quality of cooking oil used in informal food processing in Malawi: a preliminary study

A survey was conducted in Lilongwe city urban markets in Malawi, to assess the quality of cooking oil used for frying potato chips. Purposive sampling was performed to come up with respondents who were using vegetable oils. A stratified random sampling was used to select the 32 informal food processors who were interviewed using a structured questionnaire. Oil samples were collected from the most commonly used brand of oil. Fifteen respondents were selected and these were divided into three categories of five: those who were not reusing the oil, those who were reusing the oil and those who were preparing potato chips and chicken in the same oil, for chemical analysis. The preliminary results showed that while the majority (59.4%) of the informal food processors discarded the oil after 1 day, 3.1% discarded it after 4 days and another 12.5% after 3 days. A larger proportion of the respondents (40.6%) used the leftover oils at home, 37.5% kept it in oil bottles, 3.1% kept it in plastic papers for reuse the following day. Also, most respondents (57%) indicated dark colour as the sign of oil deterioration, 29% discarded the oil after noticing foam formation while 8.2% and 6.1% said they discarded the oil after noticing a bad smell and food absorbing the oils respectively. A physical observation of the various oils showed that for most of the respondents (34%), the oils were dark brown in colour, in 22%, the oils were slightly dark brown and 16%, the oils were brown. Foam formation was noticed in 13% of the respondents. It was also noted that 91% of the respondents had not been trained or briefed of food quality and safety issues. A chemical analysis of the oils showed high values of free fatty acids (range, 0.84–1.4112 compared with 0.42 in the fresh oil) and peroxide values (range 14.7–16.6 compared with 9.0 in the fresh oil). It may be concluded that the oils being used by the informal food processors in Malawi are of poor quality and so the foods cooked in them may be a health hazard to the consumers and the processors themselves. Although this work in ongoing, it may be recommended at the outset that the health department of the city assemblies should inspect these oils for the good health of the consumers.     

Block-Rate versus Uniform Water Pricing in Agriculture: An Empirical Analysis

In this article we adapt Burtless and Hausman's (1978) methodology in order to estimate farmers' demand for irrigation water under increasing block-rate tariffs and empirically assess its effect on aggregate demand and inter-farm allocation efficiency. This methodology overcomes the technical challenges raised by increasing block-rate pricing and accounts for both observed and unobserved technological heterogeneity among farmers. Employing micro panel data documenting irrigation levels and prices in 185 Israeli agricultural communities in the period 1992–1997, we estimate water demand elasticity at −0.3 in the short run (the effect of a price change on demand within a year of implementation) and −0.46 in the long run. We also find that, in accordance with common belief, switching from a single to a block-price regime, yields a 7% reduction in average water use while maintaining the same average price. However, based on our simulations we estimate that the switch to block prices will result in a loss of approximately 1% of agricultural output due to inter-farm allocation inefficiencies.     

Awareness of Distributed Denial of Service Attacks' Dangers: Role of Internet Pricing Mechanisms

Denial of Service (DoS) attacks consist of overwhelming a server, a network or a Web site in order to paralyze its normal activity. The additional parameter in Distributed Denial of Service (DdoS) attacks is the distributing strategy. It means that DDoS attacks do not come from a single computer but stem from all accessible channels and servers. Consequences are multiple, ranging from system errors, temporary inability to access the Web site for normal users to challenging the actual reliability of the Internet. Despite this, Internet users show carelessness. The explanation lies in the specificities of DDoS attacks. We explore possibilities to raise users' awareness about the actual amplitude of problems caused by DDoS attacks. We suggest a careful examination of Internet pricing mechanisms and switching from flat to usage-constraining pricing schemes.     

A Nonstandard Approach to Option Pricing

Nonstandard probability theory and stochastic analysis, as developed by Loeb, Anderson, and Keisler, has the attractive feature that it allows one to exploit combinatorial aspects of a well-understood discrete theory in a continuous setting. We illustrate this with an example taken from financial economics: a nonstandard construction of the well-known Black-Scholes option pricing model allows us to view the resulting object at the same time as both (the hyperfinite version of) the binomial Cox-Ross-Rubinstein model (that is, a hyperfinite geometric random walk) and the continuous model introduced by Black and Scholes (a geometric Brownian motion). Nonstandard methods provide a means of moving freely back and forth between the discrete and continuous points of view. This enables us to give an elementary derivation of the Black-Scholes option pricing formula from the corresponding formula for the binomial model. We also devise an intuitive but rigorous method for constructing self-financing hedge portfolios for various contingent claims, again using the explicit constructions available in the hyperfinite binomial model, to give the portfolio appropriate to the Black-Scholes model. Thus, nonstandard analysis provides a rigorous basis for the economists' intuitive notion that the Black-Scholes model contains a built-in version of the Cox-Ross-Rubinstein model.     

Pricing of Mutual Fund Services in Retirement Plans: Evidence from Open-End Equity Funds

Management fees of mutual funds are more costly to investors than is often realized. Moreover, research indicates that in many cases, the fees are not related to performance, contrary to what might be expected from an efficient market. This study uses sample data to illustrate the consequences of inefficiency to an individual investor. It then turns to an empirical examination of the determinants of the ratio of management fees to total assets (MER), investigating market concentration, fund performance, and non-performance characteristics as explanatory variables. All of these classes of variables contributed to the variation of MERs . JEL Classification G23     

Understanding the Large Negative Impact of Oil Shocks

This paper offers a plausible explanation for the close link between oil prices and aggregate macroeconomic performance in the 1970s. Although this link has been well documented in the empirical literature, standard economic models are not able to replicate this link when actual oil prices are used to simulate the models. In particular, standard models cannot explain the depth of the recession in 1974–75 and the strong revival in 1976–78 based on the oil price movements in that period. This paper argues that a missing multiplier-accelerator mechanism from standard models may hold the key.     

The relevance of currency risk in the EMU

We investigate how the elimination of intra-European exchange risk may affect international financial markets using a conditional version of the International CAPM. We estimate the EMU and non-EMU components of aggregate currency risk and document significant exposures to both. The premium for EMU risk is positive and associated with exposure to the French, Italian and Spanish currencies. The premium for non-EMU risk is consistently negative and accounts for most of the aggregate currency premiums. In the 1990s, exposures to EMU risk declined significantly while exposures to non-EMU risk increased. Hence the adoption of the Euro is unlikely to have a large impact on aggregate currency risk premiums.     

Futures and forward price differential and the effect of marking‐to‐market: Australian evidence

The objective of this paper is to examine the effects of marking‐to‐market of futures contracts on the price differential between futures and forward contracts based on the predictions of the Cox, Ingersoll and Ross (1981) (CIR) model. Cox et al ., (1981) derive a series of propositions with respect to the relationship between futures and forward prices and a set of testable implications. These are tested empirically in this paper using Australian data from November 1991 to June 1997. The results provide evidence of the presence of significant futures and forward price differences, where the futures price is consistently below the forward price. Only partial support is found for the Cox et al ., (1981) propositions, implying that the effect of marking‐to‐market is not able to fully account for the price differential. Therefore, it is not possible to rule out the influence of other institutional factors on the futures‐forward price difference.     

油品测试用规格仪器国产化回眸

指出规格仪器是油品测试方法标准化的基础，总结了油品测试用规格仪器国产化的过程，并对今后的发展方向加以分析。