Maximum likelihood estimation of stochastic volatility models

We develop and implement a method for maximum likelihood estimation in closed-form of stochastic volatility models. Using Monte Carlo simulations, we compare a full likelihood procedure, where an option price is inverted into the unobservable volatility state, to an approximate likelihood procedure where the volatility state is replaced by proxies based on the implied volatility of a short-dated at-the-money option. The approximation results in a small loss of accuracy relative to the standard errors due to sampling noise. We apply this method to market prices of index options for several stochastic volatility models, and compare the characteristics of the estimated models. The evidence for a general CEV model, which nests both the affine Heston model and a GARCH model, suggests that the elasticity of variance of volatility lies between that assumed by the two nested models.     

Differences in the Returns to Education for Males by Disability Status and Age of Disability Onset

We examine linkages between disability and the returns to education for males, incorporating the role that age of disability onset may play in these returns. Our analyses are based on the 1993 Panel of the Survey of Income and Program Participation and exploit detailed information regarding productivity-related functional limitations. We estimate a three-state switching regression model that includes a Heckman-type employment correction. The coefficient estimates vary by disability status—early-onset disability, late-onset disability, and non-disabled. Our research contributes to the disability literature by providing details on the role that education may play in the lives of persons with disabilities, depending on the age at which the disability first manifests itself. Overall, we find that males who experience disability onset after reaching adulthood experience substantial wage returns to education, larger than the returns for the non-disabled population. The average wages of individuals with poor health or disability, regardless of age of onset, are below those of the non-disabled, however, so education may serve as a buffer to protect against potential negative wage effects of becoming disabled, but this “insurance” is not sufficient to close the gap.     

Estimating affine multifactor term structure models using closed-form likelihood expansions

We develop and implement a technique for closed-form maximum likelihood estimation (MLE) of multifactor affine yield models. We derive closed-form approximations to likelihoods for nine Dai and Singleton (2000) affine models. Simulations show our technique very accurately approximates true (but infeasible) MLE. Using US Treasury data, we estimate nine affine yield models with different market price of risk specifications. MLE allows non-nested model comparison using likelihood ratio tests; the preferred model depends on the market price of risk. Estimation with simulated and real data suggests our technique is much closer to true MLE than Euler and quasi-maximum likelihood (QML) methods.     

The accounting and market consequences of accelerated share repurchases

We evaluate the representational faithfulness of the accounting treatment of a recent and well-established type of structured transaction—accelerated share repurchases (ASRs). ASRs are popular because accretive earnings per share benefits are recognized immediately, while any gains or losses on the forward contract used to execute an ASR bypass income, and are reported directly in equity. We document lower value relevance for the liabilities of ASR companies compared with a size- and industry-matched sample. ERC tests also indicate a market discount for the earnings of ASR companies compared with the control sample. Finally, we document significant abnormal returns to a trading strategy based on unrealized gains or losses on ASR transactions. Our results indicate that the current accounting for ASRs does not result in representative reporting of these transactions. As a result, financial statement users might benefit from recognition of ASR elements in financial statements.     

The Effect of Child Care Costs on the Employment and Welfare Recipiency of Single Mothers

This paper considers the effect of child care costs on two labor market outcomes for single mothers—whether to work for pay and whether to receive welfare. Hourly child care expenditures are estimated using data drawn from the 1992 and 1993 panels of the Survey of Income and Program Participation (SIPP). These expenditures are then used to predict the probability of welfare recipiency and employment. While the direction and significance of key variables are robust to changes in specification, the quantitative results are found to be sensitive to identification restrictions. All results show a substantial positive effect of child care costs on welfare recipiency, with the child care price elasticity of welfare recipiency varying from 1.0 to 1.9. Similarly, we find a significant negative effect of child care price on employment with elasticity estimates from -.3 to -1.1, showing that controlling for the welfare choice does not reduce the price elasticity of employment found in other studies.     

Analysis of commercial rumors from the perspective of marketing managers: Rumor prevalence,effects, and control tactics

This study examines commercial rumors from the perspective of marketing managers. American and French respondents (N = 133) completed a rumor questionnaire intended to assess the prevalence and types of commercial rumors that reach their ear, the severity of rumor effects, the effectiveness of rumor control tactics, and the psychological and situational variables associated with rumor onset and spread. Based on a variation of the critical incidents technique involving recalled commercial rumors, the results conform to rumor theory in terms of the psychological and situational factors (i.e. anxiety, importance, credulity, and uncertainty) underlying rumor transmission, and offer support for our proposed rumor model. The findings also highlight the prevalence and potentially negative impact of rumors in marketing sectors. As an initial attempt to discern cross-cultural differences in commercial rumor activity, preliminary findings suggest differences in effectiveness of marketing communication tactics for rumor control across the two country samples studied. Overall, the provision of requested information and attempts to increase trust emerged as the most effective rumor control tactics.     

Explaining changes in the racial digital divide in the United States from 1997 to 2007

This paper explores the dissemination of access to home Internet among Whites and Blacks in the US, the inequalities observed between the groups (known as the digital divide), the trends exhibited by the two groups in the acquisition of Internet access, and the factors contributing to these disparities. The study focuses on the large and growing digital divide observed among Whites and Blacks in the period 1997–2007. Both the standard and a variant of the Blinder–Oaxaca decomposition techniques are employed to identify and quantify the factors that contribute to this gap. In all decompositions, differences in education, family income, household composition, and access to the Internet outside the home are found to be the primary factors that explain the racial digital gap.     

Karen Olson. Wives of Steel: Voices of Women from the Sparrows Point Steelmaking Communities. University Park: Pennsylvania State University Press, 2005. x + 216 pp. ISBN 0-271-02685-5, $40.00.

In her introduction to Wives of Steel, Karen Olson warns thatthe book is "not a business or labor history of the SparrowsPoint steel complex," stressing that it is instead a genderedanalysis of an industrial community (p. 13). Yet historiansof business and labor should find much of interest in this book.By placing women at the center of her history of Sparrows Point,Maryland, and the neighboring communities of Dundalk and TurnerStation, Olson highlights the     

A NOTE ON THE DAI–SINGLETON CANONICAL REPRESENTATION OF AFFINE TERM STRUCTURE MODELS*

Dai and Singleton (2000) study a class of term structure models for interest rates that specify the short rate as an affine combination of the components of an N‐dimensional affine diffusion process. Observable quantities in such models are invariant under regular affine transformations of the underlying diffusion process. In their canonical form, the models in Dai and Singleton (2000) are based on diffusion processes with diagonal diffusion matrices. This motivates the following question: Can the diffusion matrix of an affine diffusion process always be diagonalized by means of a regular affine transformation? We show that if the state space of the diffusion is of the form for integers satisfying or , there exists a regular affine transformation of D onto itself that diagonalizes the diffusion matrix. So in this case, the Dai–Singleton canonical representation is exhaustive. On the other hand, we provide examples of affine diffusion processes with state space whose diffusion matrices cannot be diagonalized through regular affine transformation. This shows that for ), the assumption of diagonal diffusion matrices may impose unnecessary restrictions and result in an avoidable loss of generality.