Pricing mortgage-backed securities in a multifactor interest rate environment: a multivariate density estimation approach

Multivariate density estimation (MDE) suggests that mortgage-backedsecurity (MBS) prices can be well described as a function ofthe level and slope of the term structure. We analyze how thisfunction varies across MBSs with different coupons. An importantfinding is that the interest rate level proxies for the moneynessof the option, the expected level of prepayments, and the averagelife of the cash flows, while the term structure slope controlsfor the average rate at which these cash flows should be discounted.     

A mean-variance framework for tests of asset pricing models

This article presents a mean-variance framework for likelihood-ratiotests of asset pricing models. A pricing model is tested byexamining the position of one or more reference portfolios insample mean-standard-deviation space. Included are tests ofboth single-beta and multiple-beta relations, with or withouta riskless asset, using either a general or a specific alternativehypothesis. Tests with a factor that is not a portfolio returnare also included. The mean-variance framework is illustratedby testing the zero-beta CAPM, a two-beta pricing model, andthe consumption-beta model.     

Bayesian inference and portfolio efficiency

A Bayesian approach is used to investigate a sample's informationabout a portfolio's degree of inefficiency. With standard diffusepriors, posterior distributions for measures of portfolio inefficiencycan concentrate well away from values consistent with efficiency,even when the portfolio is exactly efficient in the sample.The data indicate the that the NYSE-AMEX market portfolio israther inefficient in the presence of a riskless asset, althoughthis conclusion is justified only after an anslysis using informativepriors. Including a riskless asset significantly reduces anysample's ability to produce posterior distributions supportingsmall degrees of inefficiency.     

Health scenarios and policy making Lessons from the Netherlands

A decade ago the Dutch government established the Steering Committee on Futures Health Scenarios (STG) to organize and facilitate research and debate on alternative futures in public health. The STG has since carried out dozens of scenario projects on specific health topics, and the resulting reports have played an important role in the decision-making process within the health sector. The researchers, policy makers, and administrators who have been involved with STG activities have also learned a great deal about which methodologies, processes and organizational arrangements are best for this kind of enterprise. Those lessons are shared here for the benefit of other health agencies interested in carrying out similar programmes.     

Expectations and volatility of consumption and asset returns

We find that conditional means and variances of consumptiongrowth vary through time, and this variation appears to be associatedwith the business cycle. A pricing model with fluctuating meansand variances of consumption growth provides implications aboutconditional moments of returns for both short and long investmenthorizons, and these implications are explored empirically. TheU-shaped pattern of first-order autocorrelations of returns,as well as business cycle patterns in the price of risk, appearsto be consistent with the model, but our exploration suggeststhat other implications about conditional return moments areat odds with the data.     

Liquidity as a choice variable: a lesson from the Japanese government bond market

In Japan, almost identical government bonds can trade at largeprice differentials. Motivated by this phenomenon, we examinethe issue of the value of liquidity in markets for risklesssecurities. We develop a model of an issuer of bonds, a marketmaker, and heterogeneous investors trading in an incompletemarket. We show not only that divergent prices for similar securitiescan be sustained in a rational expectations equilibrium butalso that this divergence may be optimal from the perspectiveof the issuer. Price segmentation is possible because agentshave a desire to trade, but short-sale restrictions limit theirtrading strategies and prevent them from forcing bond pricesto be equal. Restricting the form of market making to excludeprice competition and unregulated profit maximization is alsonecessary to sustain price segmentation. The optimality of segmentationfrom the issuer's standpoint arises because of the issuer'sability to charge for the liquidity services provided to theinvestors.     

BRETTON WOODS - ORIGINAL INTENTIONS AND CURRENT PROBLEMS

The Bretton Woods institutions have been subjected to a variety of criticisms in recent years and have been faced with severe problems in carrying out their objectives. The International Monetary Fund (IMF) and the World Bank have not performed in accordance with the original intentions of their founders. As shown in this article, this is in large measure because the world economic environment has been quite different from that envisaged by the participants in the Bretton Woods conference. Many of the original intended functions for these institutions are no longer relevant. This article examines the current problems facing the IMF and World Bank, with special attention to how they are related to the original intentions. For example, in recent years, a major problem has been the financial crises of member countries that have liberalized their economies in line with trends toward globalization. These crises have resulted in demands on the IMF and World Bank for financial assistance for purposes other than those for which their assistance was originally designed. Other problems of the two institutions include providing assistance to the world's poorest countries that have made virtually no development progress in recent years, and assisting the former communist countries in transition to market economies. The author gives his personal views on how these and other problems of the IMF and World Bank should be dealt with.     

Do bulls and bears move across borders? International transmission of stock returns and volatility

This article investigates empirically how returns and volatilitiesof stock indices are correlated between the Tokyo and New Yorkmarkets. Using intradaily data that define daytime and overnightreturns for both markets, we find that Tokyo (New York) daytimereturns are correlated with New York (Tokyo) overnight returns.We interpret this result as evidence that information revealedduring the trading hours of one market has a global impact onthe returns of the other market. In order to extract the globalfactor from the daytime returns of one market, we propose andestimate a signal extraction model with GARCH processes.     

Stock market risk and return: an equilibrium approach

Empirical evidence that expected stock returns are weakly relatedto volatility at the market level appears to contradict theintuition that risk and return are positively related. We investigatethis issue in a general equilibrium exchange economy characterizedby a regime-switching consumption process with time-varyingtransition probabilities between regimes. When estimated usingconsumption data, the model generates a complex, non-linearand time-varying relation between expected returns and volatility,duplicating the salient features of the risk/return trade-offin the data. The results emphasize the importance of time-varyinginvestment opportunities and highlight the perils of relyingon intuition from static models.