Separating microstructure noise from volatility

There are two variance components embedded in the returns constructed using high frequency asset prices: the time-varying variance of the unobservable efficient returns that would prevail in a frictionless economy and the variance of the equally unobservable microstructure noise. Using sample moments of high frequency return data recorded at different frequencies, we provide a simple and robust technique to identify both variance components.     

Protection for sale with imperfect rent capturing

Abstract .  Grossman and Helpman (1994) explain tariffs as the outcome of a lobbying process. In most empirical implementations of this framework protection is instead measured using non-tariff barriers. Since tariffs allow the government to fully capture the rents from protection, while non-tariff barriers do not, the existing parameter estimates of the protection for sale model are likely to be biased. To address this problem, we augment the framework by considering instruments that allow partial capturing. Our specification is supported by the data, where we find that only 72–75% of the rent from protection is appropriated by the government.     

Multi-stage real option evaluation with double barrier under stochastic volatility and interest rate

Annals of Finance - This paper focuses on valuing R&D projects using a twofold compound real option by including two knock-out barriers. However, the valuation of R&D projects is...     

The equilibrium set of two-player games with complementarities is a sublattice

Summary. I prove that the equilibrium set in a two-player game with complementarities, and totally ordered strategy spaces, is a sublattice of the joint strategy space. Received: May 31, 2001; revised version: October 4, 2002     

Performance rating and yardstick competition in social service provision

This paper investigates whether national evaluation of decentralised government performance tends, by lessening local information spill-overs, to reduce the scope for local performance comparisons and consequently to lower the extent of spatial auto-correlation among local government expenditures. It analyses local government expenditures on personal social services in the UK before and after the introduction of a national performance assessment system (SSPR, Social Services Performance Rating) that would attribute a rating to each local authority. The empirical evidence is consistent with the hypothesis that the SSPR has reduced local yardstick competition.     

Price rigidity, the mark–up, and the dynamics of the current account

The degree of competition affects the current account response to nominal shocks. The mechanism hinges on the relationship between the mark–up and the degree of real rigidity of prices. In a model with intermediate goods, the degree of real rigidity increases in the mark–up. A weaker response of prices to nominal shocks strengthens the 'expenditure switching' effect of the devaluation to the benefit of the current account. We analyse the relationship between the mark–up and the real rigidity in a simple closed economy model and show numerically how the mark–up can affect the response of the current account to monetary shocks in an open economy. JEL Classification: F32, E32
Rigidité des prix, marges bénéficiaires et la dynamique du compte courant. Ce mémoire montre que le degré de concurrence affecte la réaction du compte courant aux chocs nominaux. Le mécanisme dépend de la relation entre la marge beńéficiaire et le degré de rigidité réelle des prix. Dans un modèle qui prend en compte les biens intermédiaires, le degré de rigidité réelle des prix s'accroît avec la marge bénéficiaire. Une réponse plus faible des prix aux chocs nominaux renforce l'effet de « déplacement de la dépense >> de la dévaluation au bénéfice du compte courant. On analyse d'abord la relation entre la marge bénéficiaire et la rigidité réelle des prix dans un modèle simple d'économie fermée. On montre ensuite en chiffres comment la marge bénéficiaire peut affecter la réaction du compte courant aux chocs monétaires.     

Giffen goods and market making

Summary. This paper shows that information effects per se are not responsible for the Giffen goods anomaly affecting traders demands in multi asset noisy, rational expectations equilibrium markets. The role that information plays in traders strategies also matters. In a market with risk averse, uninformed traders, informed agents have a dual trading motive: speculation and market making. The former entails using prices to assess the effect of error terms; the latter requires employing them to disentangle noise traders demands within aggregate orders. In a correlated environment this complicates the signal extraction problem and may generate upward sloping demand curves. Assuming (i) that competitive, risk neutral market makers price the assets or that (ii) uninformed traders risk tolerance coefficient grows unboundedly, removes the market making component from informed traders demands rendering them well behaved in prices.Received: 30 April 2002, Revised: 3 December 2003, JEL Classification Numbers: G100, G120, G140.Support from the Barcelona Economics Program of CREA and the Ente per gli Studi Monetari e Finanziari Luigi Einaudi, are gratefully acknowledged. I thank Anat Admati, Jordi Caballé, Giacinta Cestone, and Xavier Vives for useful suggestions. The comments provided by the Associate Editor and an anonymous referee greatly improved the papers exposition.     

Extensive-form games and strategic complementarities

I prove the subgame-perfect equivalent of the basic result for Nash equilibria in normal-form games of strategic complements: the set of subgame-perfect equilibria is a nonempty, complete lattice—in particular, subgame-perfect Nash equilibria exist. For this purpose I introduce a device that allows the study of the set of subgame-perfect equilibria as the set of fixed points of a correspondence. My results are limited because extensive-form games of strategic complementarities turn out—surprisingly—to be a very restrictive class of games.